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Are Capital Controls Prudential? An Empirical Investigation

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  • Andrés Fernández
  • Alessandro Rebucci
  • Martín Uribe

Abstract

A growing recent theoretical literature advocates the use of prudential capital control policy, that is, the tightening of restrictions on cross-border capital flows during booms and the relaxation thereof during recessions. We examine the behavior of capital controls in a large number of countries over the period 1995-2011. We find that capital controls are remarkably acyclical. Boom-bust episodes in output, the current account, or the real exchange rate are associated with virtually no movements in capital controls. These results are robust to decomposing boom-bust episodes along a number of dimensions, including the level of development, the level of external indebtedness, or the exchange-rate regime. We also document a near complete acyclicality of capital controls during the Great Contraction of 2007-2009.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19671.

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Date of creation: Nov 2013
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Handle: RePEc:nbr:nberwo:19671

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References

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  1. Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric R. Young, 2011. "Revisiting Overborrowing and its Policy Implications," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.), Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 6, pages 145-184 Central Bank of Chile.
  2. Chinn,M.D. & Ito,H., 2005. "What matters for financial development? : capital controls, institutions, and interactions," Working papers, Wisconsin Madison - Social Systems 4, Wisconsin Madison - Social Systems.
  3. Mody, Ashoka & Murshid, Antu Panini, 2005. "Growing up with capital flows," Journal of International Economics, Elsevier, Elsevier, vol. 65(1), pages 249-266, January.
  4. Gianluca Benigno & Huigang Chen & Chris Otrok & Alessandro Rebucci & Eric Young, 2012. "Optimal Policy for Macro-Financial Stability," CEP Discussion Papers, Centre for Economic Performance, LSE dp1172, Centre for Economic Performance, LSE.
  5. Aizenman, Joshua & Pasricha, Gurnain Kaur, 2013. "Why do emerging markets liberalize capital outflow controls? Fiscal versus net capital flow concerns," Journal of International Money and Finance, Elsevier, Elsevier, vol. 39(C), pages 28-64.
  6. Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric R. Young, 2011. "Financial Crises and Macro-Prudential Policies," IDB Publications 27738, Inter-American Development Bank.
  7. Javier Bianchi & Enrique G. Mendoza, 2010. "Overborrowing, Financial Crises and 'Macro-prudential' Taxes," NBER Working Papers 16091, National Bureau of Economic Research, Inc.
  8. Javier Bianchi, 2009. "Overborrowing and systemic externalities in the business cycle," Working Paper, Federal Reserve Bank of Atlanta 2009-24, Federal Reserve Bank of Atlanta.
  9. Martín Uribe, 2006. "Individual Versus Aggregate Collateral Constraints and the Overborrowing Syndrome," NBER Working Papers 12260, National Bureau of Economic Research, Inc.
  10. Guido Lorenzoni, 2008. "Inefficient Credit Booms," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 809-833.
  11. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
  12. Nicolas E. Magud & Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "Capital Controls: Myth and Reality - A Portfolio Balance Approach," NBER Working Papers 16805, National Bureau of Economic Research, Inc.
  13. Forbes, Kristin & Fratzscher, Marcel & Straub, Roland, 2014. "Capital Controls and Macroprudential Measures: What Are They Good For?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9798, C.E.P.R. Discussion Papers.
  14. Luis Felipe Céspedes & Roberto Chang & Diego Saravia, 2010. "Monetary Policy Under Financial Turbulence: an Overview," Working Papers Central Bank of Chile, Central Bank of Chile 594, Central Bank of Chile.
  15. Emmanuel Farhi & Ivan Werning, 2012. "Dealing with the Trilemma: Optimal Capital Controls with Fixed Exchange Rates," NBER Working Papers 18199, National Bureau of Economic Research, Inc.
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Cited by:
  1. Davis, Scott & Presno, Ignacio, 2014. "Capital controls as an instrument of monetary policy," Globalization and Monetary Policy Institute Working Paper, Federal Reserve Bank of Dallas 171, Federal Reserve Bank of Dallas.

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