Capital Controls: Myth and Reality - A Portfolio Balance Approach
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 capital controls on short-term flows. We find that there should exist country-specific characteristics for capital controls to be effective. From this 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16805.
Date of creation: Feb 2011
Date of revision:
Note: IFM ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- 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.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- F3 - International Economics - - International Finance
- F30 - International Economics - - International Finance - - - General
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-26 (All new papers)
- NEP-IFN-2011-02-26 (International Finance)
- NEP-MAC-2011-02-26 (Macroeconomics)
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.:
- Rudi Dornbusch, 2001. "Malaysia: Was it Different?," NBER Working Papers 8325, National Bureau of Economic Research, Inc.
- Reinhart, Vincent R, 2000. "How the Machinery of International Finance Runs with Sand in Its Wheels," Review of International Economics, Wiley Blackwell, vol. 8(1), pages 74-85, February.
- Benedict J. Clements & Herman Kamil, 2009. "Are Capital Controls Effective in the 21st Century? the Recent Experience of Colombia," IMF Working Papers 09/30, International Monetary Fund.
- Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1994.
"The Capital Inflows Problem: Concepts And Issues,"
Contemporary Economic Policy,
Western Economic Association International, vol. 12(3), pages 54-66, 07.
- Reinhart, Carmen & Reinhart, Vincent, 1999.
"On the use of reserve requirements in dealing with capital flow problems,"
13703, University Library of Munich, Germany.
- Reinhart, Carmen M & Reinhart, Vincent R, 1999. "On the Use of Reserve Requirements in Dealing with Capital Flow Problems," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 27-54, January.
- Natalia T. Tamirisa, 2004. "Do Macroeconomic Effects of Capital Controls Vary by their Type? Evidence From Malaysia," IMF Working Papers 04/3, International Monetary Fund.
- Kaplan, Ethan & Rodrik, Dani, 2001.
"Did the Malaysian Capital Controls Work?,"
CEPR Discussion Papers
2754, C.E.P.R. Discussion Papers.
- 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?," Working Paper Series rwp01-008, Harvard University, John F. Kennedy School of Government.
- Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003.
NBER Working Papers
9908, 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.
- Sebastian Edwards, 1999.
"How Effective are Capital Controls?,"
NBER Working Papers
7413, National Bureau of Economic Research, Inc.
- Francisco Gallego & Leonardo Hernández & Klaus Schmidt-Hebbel, 1999.
"Capital Controls in Chile: Effective? Efficient?,"
Working Papers Central Bank of Chile
59, Central Bank of Chile.
- Francisco A. Gallego & Leonardo Hernandez & Klaus Schmidt-Hebbel, 2000. "Capital Controls in Chile: Effective? Efficient?," Econometric Society World Congress 2000 Contributed Papers 0330, Econometric Society.
- Leonardo Bartolini & Allan Drazen, 1996.
"Capital account liberalization as a signal,"
11, Federal Reserve Bank of New York.
- 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.
- Reinhart, Carmen & Smith, R Todd, 2002.
"Temporary controls on capital inflows,"
13863, University Library of Munich, Germany.
- Hernán Rincón & Jorge Toro, 2010.
"Are Capital Controls and Central Bank Intervention Effective?,"
BORRADORES DE ECONOMIA
007622, BANCO DE LA REPÚBLICA.
- Hernán Rincón & Jorge Toro, . "Are Capital Controls and Central Bank Intervention Effective?," Borradores de Economia 625, Banco de la Republica de Colombia.
- Liliana Rojas-SuÃ¡rez & Donald J. Mathieson, 1993.
"Liberalization of the Capital Account,"
IMF Occasional Papers
103, International Monetary Fund.
- De Gregorio, Jose & Edwards, Sebastian & Valdes, Rodrigo O., 2000.
"Controls on capital inflows: do they work?,"
Journal of Development Economics,
Elsevier, vol. 63(1), pages 59-83, October.
- 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.
- Bernard Laurens & Jaime Cardoso, 1998. "Managing Capital Flows," IMF Working Papers 98/168, International Monetary Fund.
- Reinhart, Carmen & Calvo, Guillermo, 2002.
"Fear of floating,"
14000, University Library of Munich, Germany.
- Reinhart, Carmen & Edison, Hali, 2001.
"Stopping hot money,"
13862, University Library of Munich, Germany.
- Sebastian Edwards, 2007. "Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences," NBER Books, National Bureau of Economic Research, Inc, number edwa06-1.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
- Akira Ariyoshi & Andrei Kirilenko & Inci Ã–tker & Bernard Laurens & Jorge IvÃ¡n Canales Kriljenko & Karl Friedrich Habermeier, 2000. "Capital Controls," IMF Occasional Papers 190, International Monetary Fund.
- James Tobin, 1978.
"A Proposal for International Monetary Reform,"
Eastern Economic Journal,
Eastern Economic Association, vol. 4(3-4), pages 153-159, Jul/Oct.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.