Capital controls: myth and reality, a portfolio balance approach to capital controls
AbstractThe literature on capital controls has (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a "success" and (iv) the empirical studies lack a common methodology--furthermore these are significantly "overweighted" by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as capital controls. Also, given that success is measured so differently across studies, we sought to "standardize" the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of capital controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies in that the WCCE controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia. Then, using a portfolio balance approach we model the effects of imposing short-term capital controls. We find that there should exist country-specific characteristics for capital controls to be effective. From these simple perspective, this rationalizes why some capital controls were effective and some were not. We also show that the equivalence in effects of price- vs. quantity-capital control are conditional on the level of short-term capital flows.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2007-31.
Date of creation: 2007
Date of revision:
Other versions of this item:
- Nicolas Magud & Carmen Reinhart & Kenneth Rogoff, 2005. "Capital Controls: Myth and Reality A Portfolio Balance Approach to Capital Controls," University of Oregon Economics Department Working Papers 2006-10, University of Oregon Economics Department.
- F30 - International Economics - - International Finance - - - General
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Reinhart, Carmen & Smith, R Todd, 2002.
"Temporary controls on capital inflows,"
13863, University Library of Munich, Germany.
- Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003.
13932, University Library of Munich, Germany.
- James Tobin, 1978.
"A Proposal for International Monetary Reform,"
Cowles Foundation Discussion Papers
506, Cowles Foundation for Research in Economics, Yale University.
- Reinhart, Carmen & Magud, Nicolas, 2007.
"Capital controls: An evaluation,"
14097, University Library of Munich, Germany.
- Nicolas Magud & Carmen M. Reinhart, 2006. "Capital Controls: An Evaluation," NBER Working Papers 11973, National Bureau of Economic Research, Inc.
- Nicolas Magud & Carmen M. Reinhart, 2005. "Capital Controls: An Evaluation," University of Oregon Economics Department Working Papers 2005-19, University of Oregon Economics Department.
- Eliana Cardoso & Ilan Goldfajn, 1998. "Capital Flows to Brazil: The Endogeneity of Capital Controls," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 161-202, March.
- Reinhart, Carmen & Calvo, Guillermo, 2002.
"Fear of floating,"
14000, University Library of Munich, Germany.
- Liliana Rojas-SuÃ¡rez & Donald J. Mathieson, 1993.
"Liberalization of the Capital Account: Experiences and Issues,"
IMF Occasional Papers
103, International Monetary Fund.
- Donald J. Mathieson & Liliana Rojas-SuÃ¡rez, 1992. "Liberalization of the Capital Account: Experiences and Issues," IMF Working Papers 92/46, International Monetary Fund.
- Rudi Dornbusch, 2001. "Malaysia: Was it Different?," NBER Working Papers 8325, National Bureau of Economic Research, Inc.
- Jacques Miniane & John H. Rogers, 2007.
"Capital Controls and the International Transmission of U.S. Money Shocks,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 39(5), pages 1003-1035, 08.
- Jacques Miniane & John H. Rogers, 2003. "Capital controls and the international transmission of U.S. money shocks," International Finance Discussion Papers 778, Board of Governors of the Federal Reserve System (U.S.).
- Sebastian Edwards, 1999.
"How Effective Are Capital Controls?,"
Journal of Economic Perspectives,
American Economic Association, vol. 13(4), pages 65-84, Fall.
- Ethan Kaplan & Dani Rodrik, 2001.
"Did the Malaysian Capital Controls Work?,"
NBER Working Papers
8142, National Bureau of Economic Research, Inc.
- Kaplan, Ethan & Rodrik, Dani, 2001. "Did the Malaysian Capital Controls Work?," CEPR Discussion Papers 2754, C.E.P.R. Discussion Papers.
- Kaplan, Ethan & Rodrik, Dani, 2001. "Did the Malaysian Capital Controls Work?," Working Paper Series rwp01-008, Harvard University, John F. Kennedy School of Government.
- Sebastian Edwards & Roberto Rigobon, 2005. "Capital Controls, Exchange Rate Volatility and External Vulnerability," NBER Working Papers 11434, National Bureau of Economic Research, Inc.
- Carmen M. Reinhart & R. Todd Smith, 1996.
"Too much of a good thing: the macroeconomic effects of taxing capital inflows,"
Federal Reserve Bank of San Francisco, pages 436-464.
- Reinhart, Carmen & Smith, R. Todd, 1998. "Too much of a good thing: The macroeconomic effects of taxing capital inflows," MPRA Paper 13234, University Library of Munich, Germany.
- Jose De Gregorio & Sebastian Edwards & Rodrigo O. Valdes, 2000.
"Controls on Capital Inflows: Do they Work?,"
NBER Working Papers
7645, National Bureau of Economic Research, Inc.
- Edison, Hali & Reinhart, Carmen M., 2001.
"Stopping hot money,"
Journal of Development Economics,
Elsevier, vol. 66(2), pages 533-553, December.
- Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1994.
"The capital inflows problem: Concepts and issues,"
13902, University Library of Munich, Germany.
- repec:rus:hseeco:123922 is not listed on IDEAS
- Mouhamadou Sy, 2012. "Exchange Rate Regimes, Capital Controls and the Pattern of Speculative Capital Flows," PSE Working Papers halshs-00684591, HAL.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger).
If references are entirely missing, you can add them using this form.