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Did the Indian Capital Controls Work as a Tool of Macroeconomic Policy?

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  • Ila Patnaik
  • Ajay Shah

Abstract

The present debate over capital controls emphasizes their potential role as tools for macroeconomic and financial stability. The effectiveness of these tools may depend on whether a country has the legal and administrative machinery to implement capital controls. This paper contributes to the analysis of the costs and benefits of capital controls by studying the experience of India, a country that has a system of capital controls that had never been dismantled. The paper finds that when the capital controls were used as tools of macroeconomic policy, during a capital surge, the Indian experience appears to be similar to that of other countries.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal IMF Economic Review.

Volume (Year): 60 (2012)
Issue (Month): 3 (September)
Pages: 439-464

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Handle: RePEc:pal:imfecr:v:60:y:2012:i:3:p:439-464

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References

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  1. Patnaik, Ila & Shah, Ajay, 2008. "Does the currency regime shape unhedged currency exposure," Working Papers 08/50, National Institute of Public Finance and Policy.
  2. Anton Korinek, 2011. "The New Economics of Capital Controls Imposed for Prudential Reasons+L4888," IMF Working Papers 11/298, International Monetary Fund.
  3. Jonathan D Ostry & Atish R Ghosh & Marcos Chamon & Mahvash S Qureshi, 2011. "Capital Controls: When and Why?," IMF Economic Review, Palgrave Macmillan, vol. 59(3), pages 562-580, August.
  4. Mahmood Pradhan & Ravi Balakrishnan & Reza Baqir & Geoffrey Heenan & Sylwia Nowak & Ceyda Oner & Sanjaya Panth, 2011. "Policy Responses to Capital Flows in Emerging Markets," IMF Staff Discussion Notes 11/10, International Monetary Fund.
  5. Patnaik, Ila & Shah, Ajay & Sethy, Anmol & Balasubramaniam, Vimal, 2011. "The exchange rate regime in Asia: From crisis to crisis," International Review of Economics & Finance, Elsevier, vol. 20(1), pages 32-43, January.
  6. Enrica Detragiache & Abdul Abiad & Thierry Tressel, 2008. "A New Database of Financial Reforms," IMF Working Papers 08/266, International Monetary Fund.
  7. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004," CEPR Discussion Papers 5644, C.E.P.R. Discussion Papers.
  8. Prasad, Eswar, 2009. "India's Approach to Capital Account Liberalization," IZA Discussion Papers 3927, Institute for the Study of Labor (IZA).
  9. Ila Patnaik & Ajay Shah, 2009. "The difficulties of the Chinese and Indian exchange rate regimes," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 6(1), pages 157-173, June.
  10. Cardarelli, Roberto & Elekdag, Selim & Kose, M. Ayhan, 2010. "Capital inflows: Macroeconomic implications and policy responses," Economic Systems, Elsevier, vol. 34(4), pages 333-356, December.
  11. 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.
  12. Nicolas E. Magud E. & Carmen M. & Kenneth S. Rogoff, 2011. "Capital Controls: Myth and Reality--A Portfolio Balance Approach," Working Paper Series WP11-7, Peterson Institute for International Economics.
  13. 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.
  14. Chikako Baba & Annamaria Kokenyne, 2011. "Effectiveness of Capital Controls in Selected Emerging Markets in the 2000's," IMF Working Papers 11/281, International Monetary Fund.
  15. Ila Patnaik & Ajay Shah, 2010. "Why India choked when Lehman broke," Finance Working Papers 22974, East Asian Bureau of Economic Research.
  16. Ajay Shah & Ila Patnaik, 2007. "India’s Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 609-644 National Bureau of Economic Research, Inc.
  17. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  18. Guonan Ma & Corrinne Ho & Robert N McCauley, 2004. "The markets for non-deliverable forwards in Asian currencies," BIS Quarterly Review, Bank for International Settlements, June.
  19. Zeileis, Achim & Shah, Ajay & Patnaik, Ila, 2010. "Testing, monitoring, and dating structural changes in exchange rate regimes," Computational Statistics & Data Analysis, Elsevier, vol. 54(6), pages 1696-1706, June.
  20. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
  21. Chang, Roberto & Velasco, Andres, 2006. "Currency mismatches and monetary policy: A tale of two equilibria," Journal of International Economics, Elsevier, vol. 69(1), pages 150-175, June.
  22. Levy Yeyati, Eduardo & Schmukler, Sergio L. & Van Horen, Neeltje, 2009. "International financial integration through the law of one price: The role of liquidity and capital controls," Journal of Financial Intermediation, Elsevier, vol. 18(3), pages 432-463, July.
  23. Dennis Quinn & Martin Schindler & A Maria Toyoda, 2011. "Assessing Measures of Financial Openness and Integration," IMF Economic Review, Palgrave Macmillan, vol. 59(3), pages 488-522, August.
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Citations

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Cited by:
  1. Patnaik, Ila & Shah, Ajay, 2013. "The investment technology of foreign and domestic institutional investors in an emerging market," Journal of International Money and Finance, Elsevier, vol. 39(C), pages 65-88.
  2. Joshua Aizenman & Gurnain Pasricha, 2013. "Why Do Emerging Markets Liberalize Capital Outflow Controls? Fiscal versus Net Capital Flow Concerns," Working Papers 13-21, Bank of Canada.
  3. Bhattacharya, Rudrani & Patnaik,Ila, 2014. "Monetary policy analysis in an inflation targeting framework in emerging economies: The case of India," Working Papers 14/131, National Institute of Public Finance and Policy.

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