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Why do emerging markets liberalize capital outflow controls? Fiscal versus net capital flow concerns

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  • Aizenman, Joshua
  • Pasricha, Gurnain Kaur

Abstract

In this paper, we provide empirical evidence on the factors that motivated emerging economies to change their capital outflow controls in the recent decades. Liberalization of capital outflow controls can allow emerging market economies (EMEs) to reduce net capital inflow (NKI) pressures, but may cost their governments the fiscal revenues that external financial repression generates. Our results indicate that external repression revenues in EMEs declined substantially in the 2000's compared with the 1980's. In line with this decline in external repression revenues and their growth accelerations in 2000's, concerns related to net capital inflows took predominance over fiscal concerns in the decisions to liberalize capital outflow controls. Emerging markets facing high volatility in net capital inflows and higher short-term balance sheet exposures liberalized outflows less. Countries eased outflows more in response to higher stock price appreciation, higher appreciation pressures in the exchange market and higher real exchange rate volatility. Non-IT monetary policy regimes also liberalized outflows more in response to greater reserves accumulation and higher NKI.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 39 (2013)
Issue (Month): C ()
Pages: 28-64

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Handle: RePEc:eee:jimfin:v:39:y:2013:i:c:p:28-64

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Capital controls; Revenues from financial repression; Capital inflows management;

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References

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  1. Michael Hutchison & Gurnain Kaur Pasricha & Nirvikar Singh, 2011. "Effectiveness of Capital Controls in India: Evidence from the Offshore NDF Market," Working Papers 11-29, Bank of Canada.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
  3. Joshua Aizenman & Yothin Jinjarak, 2006. "Globalization and Developing Countries - A Shrinking Tax Base?," NBER Working Papers 11933, National Bureau of Economic Research, Inc.
  4. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
  5. Michael W. Klein, 2012. "Capital Controls: Gates versus Walls," NBER Working Papers 18526, National Bureau of Economic Research, Inc.
  6. Broner, Fernando & Didier, Tatiana & Erce, Aitor & Schmukler, Sergio L., 2011. "Gross capital flows : dynamics and crises," Policy Research Working Paper Series 5768, The World Bank.
  7. Reinhart, Carmen & Kirkegaard, Jacob & Sbrancia, Belen, 2011. "Financial repression redux," MPRA Paper 31641, University Library of Munich, Germany.
  8. Christoph Trebesch & Michael G Papaioannou & Udaibir S. Das, 2012. "Sovereign Debt Restructurings 1950-2010," IMF Working Papers 12/203, International Monetary Fund.
  9. Vittorio Grilli & Gian-Maria Milesi-Ferretti, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Working Papers 95/31, International Monetary Fund.
  10. Aizenman, Joshua & Guidotti, Pablo E., 1994. "Capital controls, collection costs and domestic public debt," Journal of International Money and Finance, Elsevier, vol. 13(1), pages 41-54, February.
  11. Bird,Richard & Gendron,Pierre-Pascal, 2011. "The VAT in Developing and Transitional Countries," Cambridge Books, Cambridge University Press, number 9781107401440, April.
  12. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
  13. Sebastian Edwards, 2007. "Capital Controls, Sudden Stops, and Current Account Reversals," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 73-120 National Bureau of Economic Research, Inc.
  14. Giovannini, Alberto & de Melo, Martha, 1993. "Government Revenue from Financial Repression," American Economic Review, American Economic Association, vol. 83(4), pages 953-63, September.
  15. Ila Patnaik & Ajay Shah, 2012. "Did the Indian Capital Controls Work as a Tool of Macroeconomic Policy?," IMF Economic Review, Palgrave Macmillan, vol. 60(3), pages 439-464, September.
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Cited by:
  1. Kristin Forbes & Marcel Fratzscher & Roland Straub, 2013. "Capital Controls and Macroprudential Measures: What Are They Good For?," Discussion Papers of DIW Berlin 1343, DIW Berlin, German Institute for Economic Research.
  2. Joshua Aizenman & Yothin Jinjarak & Nancy Marion, 2014. "China’s Growth, Stability, and Use of International Reserves," Open Economies Review, Springer, vol. 25(3), pages 407-428, July.
  3. Andrés Fernández & Alessandro Rebucci & Martín Uribe, 2013. "Are Capital Controls Prudential? An Empirical Investigation," NBER Working Papers 19671, National Bureau of Economic Research, Inc.
  4. G. Andrew Karolyi & David T. Ng & Eswar S. Prasad, 2013. "The Coming Wave," Working Papers 082013, Hong Kong Institute for Monetary Research.

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