Evaluating the Success of Malaysia’s Exchange Controls (1998-99)

Abstract

The paper evaluates in depth, the exchange control measures imposed by Malaysia in September-1998. Controls are evaluated using three alternative benchmarks—Malaysia vs. itself (pre-controls), vs. ex-ante forecasts of Malaysia for the year-1999, and Malaysia vs. the other affected East Asian economies. The comparisons suggest that controls were effective in turning some key variables around, especially the stock market index, and also enabled Malaysia to incur fewer social costs vis-à-vis the other crisis-economies. Finally, a GARCH measure of Malaysia’s interest-rate and stock-market volatility is obtained and the impact of controls on volatility studied. Evidence was found of volatility responding differentially to the Russian crisis (before controls) and the Brazilian crisis (after controls), indicating that controls helped insulate Malaysia from developments in global financial markets. Overall the paper confirms the necessity of LDCs retaining the capital controls option in the absence of material efforts to reform the international financial architecture and the inadequacy of conventional policy tools to effectively deal with present-day capital flows.