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Capital flow deflection

Author

Listed:
  • Giordani, Paolo E.
  • Ruta, Michele
  • Weisfeld, Hans
  • Zhu, Ling

Abstract

This paper focuses on the coordination problem among countries imposing controls on capital inflows. In a simple model of capital flows and controls, we show that inflow restrictions distort international capital flows to other countries and that, in turn, such capital flow deflection may lead to a policy response. We then test the theory using data on inflow restrictions and gross capital inflows for a large sample of developing countries between 1995 and 2009. Our estimation yields strong evidence that capital controls deflect capital flows to other countries with similar economic characteristics. Notwithstanding these strong cross-border spillover effects, we do not find evidence of a policy response.

Suggested Citation

  • Giordani, Paolo E. & Ruta, Michele & Weisfeld, Hans & Zhu, Ling, 2017. "Capital flow deflection," Journal of International Economics, Elsevier, vol. 105(C), pages 102-118.
    • Handle: RePEc:eee:inecon:v:105:y:2017:i:c:p:102-118
    DOI: 10.1016/j.jinteco.2016.12.007
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    More about this item

    Keywords

    Capital flows; Capital controls; Cross-border spillovers; Policy response;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F5 - International Economics - - International Relations, National Security, and International Political Economy

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