Restrictions on Short-Term Capital Inflows and the Response of Direct Investment

Capital controls remain a common approach to capital flows management. Meanwhile, the IMF has revised its position regarding selective use capital controls. However, the effects of granular variation in capital controls by asset category and direction of flow are not fully documented. Using a new dataset on capital control measures, I find that countries using capital controls on short-term capital inflows receive a higher level of direct investment inflows, and that this effect is decreasing in the country’s growth rate. I show that this result is consistent with the interpretation that the capital control serves as a signal of stability in slower-growing countries.