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Capital Controls: Mud in the Wheels of Market Discipline

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Kristin J. Forbes

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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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Handle: RePEc:nbr:nberwo:10284

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F3 - International Economics - - International Finance
F15 - International Economics - - Trade - - - Economic Integration

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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.:
  1. Reuven Glick & Michael Hutchison, . "Stopping "Hot Money" or Signaling Bad Policy? Capital Controls and the Onset of Currency Crises," EPRU Working Paper Series 00-14, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  2. Kaplan, Ethan & Rodrik, Dani, 2001. "Did the Malaysian Capital Controls Work?," CEPR Discussion Papers 2754, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Gaston R. Gelos & Shang-Jin Wei, 2002. "Transparency and International Investor Behavior," IMF Working Papers 02/174, International Monetary Fund. [Downloadable!]
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  4. Kenneth Rogoff & M. Ayhan Kose & Eswar Prasad & Shang-Jin Wei, 2004. "Effects on Financial Globalization on Developing Countries: Some Empirical Evidence," IMF Occasional Papers 220, International Monetary Fund.
  5. Michael W. Klein, 2003. "Capital Account Openness and the Varieties of Growth Experience," NBER Working Papers 9500, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Stanley Fischer, 2002. "Financial Crises and Reform of the International Financial System," NBER Working Papers 9297, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers 506, Cowles Foundation, Yale University. [Downloadable!]
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  8. 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. [Downloadable!]
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  9. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, 04. [Downloadable!] (restricted)
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  10. 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, 09. [Downloadable!] (restricted)
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  11. Francisco A. Gallego F & Leonardo Hernández, 2003. "Microeconomic Effects of Capital Controls: The Chilean Experience During the 1990s," Working Papers Central Bank of Chile 203, Central Bank of Chile. [Downloadable!]
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  12. Henry, Peter Blair, 2000. "Do stock market liberalizations cause investment booms?," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 301-334. [Downloadable!] (restricted)
  13. Francisco Nadal-De Simone & Piritta Sorsa, 1999. "A Review of Capital Account Restrictions in Chile in the 1990s," IMF Working Papers 99/52, International Monetary Fund.
  14. Johnson, Simon & Mitton, Todd, 2003. "Cronyism and capital controls: evidence from Malaysia," Journal of Financial Economics, Elsevier, vol. 67(2), pages 351-382, February. [Downloadable!] (restricted)
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  1. 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. [Downloadable!]
  2. Laura Alfaro & Andrew Charlton, 2007. "International Financial Integration and Entrepreneurial Firm Activity," NBER Working Papers 13118, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Bernardo S. de M. Carvalho & Márcio G. P. Garcia, 2006. "Ineffective Controls On Capital Inflows Under Sophisticated Financial Markets: Brazil In The Nineties," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 58, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
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