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Testing Alternative Explanations Of Capital Control Liberalization

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  • Quan Li
  • Dale L. Smith

Abstract

The literature on why restrictions over capital flows have been liberalized is filled with alternative causal stories (the pluralist, statist and systemic model, and economic explanations). In this article, we provide a test of these models of capital control liberalization within the context of 18 OECD countries from 1967 to 1995. We have avoided the usual practice of aggregating multiple governments in one country within one year into one country‐year observation, and use the country‐year‐government as the unit of analysis instead to correctly test the relationship between government characteristics and liberalization policy. We find that when the government considers lifting or imposing restrictions over capital flows, it responds to both systemic pressures and the key supporters of free capital flows. Governments also consider the current account balance and are heavily influenced by the prior policy choice regarding restrictions on capital transactions. We fail to find support for such explanations as the impact of government ideology, government strength, and central bank independence.

Suggested Citation

  • Quan Li & Dale L. Smith, 2002. "Testing Alternative Explanations Of Capital Control Liberalization," Review of Policy Research, Policy Studies Organization, vol. 19(1), pages 28-52, March.
    • Handle: RePEc:bla:revpol:v:19:y:2002:i:1:p:28-52
    DOI: 10.1111/j.1541-1338.2002.tb00228.x
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