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Capital Controls: Mud in the Wheels of Market Discipline

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  • Kristin J. Forbes

Abstract

Widespread support for capital account liberalization in emerging markets has recently shifted to skepticism and even support for capital controls in certain circumstances. This sea-change in attitudes has been bolstered by the inconclusive macroeconomic evidence on the benefits of capital account liberalization. There are several compelling reasons why it is difficult to measure the aggregate impact of capital controls in very different countries. Instead, a new and more promising approach is more detailed microeconomic studies of how capital controls have generated specific distortions in individual countries. Several recent papers have used this approach and examined very different aspects of capital controls from their impact on crony capitalism in Malaysia and on financing constraints in Chile, to their impact on US multinational behavior and the efficiency of stock market pricing. Each of these diverse studies finds a consistent result: capital controls have significant economic costs and lead to a misallocation of resources. This new microeconomic evidence suggests that capital controls are not just sand', but rather mud in the wheels' of market discipline.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10284.

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Date of creation: Feb 2004
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Publication status: published as Borio, Claudio, et al (eds.) Market discipline across countries and industries. Cambridge and London: MIT Press, 2004.
Handle: RePEc:nbr:nberwo:10284

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References

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  1. Kan Li & Randall Morck & Fan Yang & Bernard Yeung, 2004. "Firm-Specific Variation and Openness in Emerging Markets," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 658-669, August.
  2. Geert Bekaert & Campbell R. Harvey, 1997. "Foreign Speculators and Emerging Equity Markets," NBER Working Papers 6312, National Bureau of Economic Research, Inc.
  3. Johnson, Simon & Mitton, Todd, 2003. "Cronyism and capital controls: evidence from Malaysia," Journal of Financial Economics, Elsevier, vol. 67(2), pages 351-382, February.
  4. Shang-Jin Wei & Gaston Gelos, 2002. "Transparency and International Investor Behavior," IMF Working Papers 02/174, International Monetary Fund.
  5. Forbes, Kristin J., 2003. "One Cost of the Chilean Capital Controls: Increased Financial Constraints for Smaller Traded Firms," Working papers 4273-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  6. Reuven Glick & Michael Hutchison, . "Stopping "Hot Money" or Signaling Bad Policy? Capital Controls and the Onset of Currency Crises," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 00-14, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  7. Francisco Nadal-De Simone & Piritta Sorsa, 1999. "A Review of Capital Account Restrictions in Chile in the 1990's," IMF Working Papers 99/52, International Monetary Fund.
  8. Kaplan, Ethan & Rodrik, Dani, 2001. "Did the Malaysian Capital Controls Work?," CEPR Discussion Papers 2754, C.E.P.R. Discussion Papers.
  9. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers 506, Cowles Foundation for Research in Economics, Yale University.
  10. M. Ayhan Kose & Kenneth Rogoff & Eswar Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries," IMF Occasional Papers 220, International Monetary Fund.
  11. Sebastian Edwards & Jeffrey A. Frankel, 2002. "Preventing Currency Crises in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number edwa02-2.
  12. Rudi Dornbusch, 2002. "Malaysia’s Crisis: Was It Different?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 441-460 National Bureau of Economic Research, Inc.
  13. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2004. "Capital Controls, Liberalizations, and Foreign Direct Investement," NBER Working Papers 10337, National Bureau of Economic Research, Inc.
  14. Henry, Peter Blair, 2000. "Do stock market liberalizations cause investment booms?," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 301-334.
  15. Michael W. Klein, 2003. "Capital Account Openness and the Varieties of Growth Experience," NBER Working Papers 9500, National Bureau of Economic Research, Inc.
  16. Stanley Fischer, 2002. "Financial Crises and Reform of the International Financial System," NBER Working Papers 9297, National Bureau of Economic Research, Inc.
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Cited by:
  1. Kristin J. Forbes, 2005. "Capital Controls: Mud in the Wheels of Market Efficiency," Cato Journal, Cato Journal, Cato Institute, vol. 25(1), pages 153-166, Winter.
  2. Bernardo S. de M. Carvalho & Márcio G.P. Garcia, 2006. "Ineffective Controls on Capital Inflows Under Sophisticated Financial Markets: Brazil in the Nineties," NBER Working Papers 12283, National Bureau of Economic Research, Inc.
  3. Alfaro, Laura & Hammel, Eliza, 2007. "Capital flows and capital goods," Journal of International Economics, Elsevier, vol. 72(1), pages 128-150, May.
  4. Steinherr, Alfred & Cisotta, Alessandro & Klar, Erik & Sehovic, Kenan, 2006. "Liberalizing Cross-Border Capital Flows: How Effective Are Institutional Arrangements against Crisis in Southeast Asia," Working Papers on Regional Economic Integration 6, Asian Development Bank.
  5. Andreas Hauskrecht & Nhan Le, 2005. "Capital Account Liberalization for a Small, Open Economy," Working Papers 2005-13, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  6. Laura Alfaro & Andrew Charlton, 2007. "International Financial Integration and Entrepreneurial Firm Activity," NBER Working Papers 13118, National Bureau of Economic Research, Inc.

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