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Capital Controls: Myth and Reality A Portfolio Balance Approach to Capital Controls

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  • Nicolas Magud

    () (University of Oregon Economics Department)

  • Carmen Reinhart

    (University of Maryland and NBER)

  • Kenneth Rogoff

    (Harvard University and NBER)

Abstract

The 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 only 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.

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Bibliographic Info

Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2006-10.

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Length: 45
Date of creation: 11 Jan 2005
Date of revision:
Handle: RePEc:ore:uoecwp:2006-10

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Keywords: Capital controls;

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References

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  1. Liliana Rojas-Suárez & Donald J. Mathieson, 1993. "Liberalization of the Capital Account: Experiences and Issues," IMF Occasional Papers 103, International Monetary Fund.
  2. Kaplan, Ethan & Rodrik, Dani, 2001. "Did the Malaysian Capital Controls Work?," CEPR Discussion Papers 2754, C.E.P.R. Discussion Papers.
  3. Areendam Chanda, 2002. "The Influence of Capital Controls on Long Run Growth: Where and How Much?," International Finance 0201001, EconWPA.
  4. 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.
  5. Reinhart, Carmen & Rogoff, Kenneth & Savastano, Miguel, 2003. "Debt intolerance," MPRA Paper 13932, University Library of Munich, Germany.
  6. Hali J. Edison & Michael W. Klein & Luca Ricci & Torsten Sloek, 2002. "Capital Account Liberalization and Economic Performance: Survey and Synthesis," NBER Working Papers 9100, National Bureau of Economic Research, Inc.
  7. Reinhart, Carmen & Smith, R Todd, 2002. "Temporary controls on capital inflows," MPRA Paper 13863, University Library of Munich, Germany.
  8. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
  9. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1994. "The capital inflows problem: Concepts and issues," MPRA Paper 13902, University Library of Munich, Germany.
  10. Sebastian Edwards, 1999. "How Effective are Capital Controls?," NBER Working Papers 7413, National Bureau of Economic Research, Inc.
  11. Reinhart, Carmen & Reinhart, Vincent, 1998. "“Some Lessons for Policy Makers Who Deal with the Mixed Blessing of Capital Inflows,”," MPRA Paper 7123, University Library of Munich, Germany.
  12. 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.
  13. Nicolas Magud & Carmen M. Reinhart, 2007. "Capital Controls: An Evaluation," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 645-674 National Bureau of Economic Research, Inc.
  14. Carmen M. Reinhart & R. Todd Smith, 1996. "Too much of a good thing: the macroeconomic effects of taxing capital inflows," Proceedings, Federal Reserve Bank of San Francisco, pages 436-464.
  15. James Tobin, 1978. "A Proposal for International Monetary Reform," Cowles Foundation Discussion Papers 506, Cowles Foundation for Research in Economics, Yale University.
  16. Guillermo Calvo & Carmen Reinhart & Leonardo Leiderman, 1993. "The Capital Inflows Problem: Concepts and Issues," IMF Policy Discussion Papers 93/10, International Monetary Fund.
  17. 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.
  18. Kristin J. Forbes, 2003. "One Cost of the Chilean Capital Controls: Increased Financial Constraints for Smalles Traded Firms," NBER Working Papers 9777, National Bureau of Economic Research, Inc.
  19. repec:rus:hseeco:123922 is not listed on IDEAS
  20. Simon Johnson & Todd Mitton, 2001. "Cronyism and Capital Controls: Evidence from Malaysia," NBER Working Papers 8521, National Bureau of Economic Research, Inc.
  21. Isriya Nitithanprapas & Sunil Rongala & Thomas D. Willett, 2002. "The Role of Capital Controls and Currency Regimes in the Asian Crisis," Claremont Colleges Working Papers 2002-21, Claremont Colleges.
  22. Sebastian Edwards & Roberto Rigobon, 2005. "Capital Controls, Exchange Rate Volatility and External Vulnerability," NBER Working Papers 11434, National Bureau of Economic Research, Inc.
  23. Reinhart, Carmen & Edison, Hali, 2001. "Stopping hot money," MPRA Paper 13862, University Library of Munich, Germany.
  24. De Grauwe, Paul, 2000. "Controls on capital flows," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/101337, Katholieke Universiteit Leuven.
  25. 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.).
  26. Rudi Dornbusch, 2001. "Malaysia: Was it Different?," NBER Working Papers 8325, National Bureau of Economic Research, Inc.
  27. Natalia T. Tamirisa & R. B. Johnston, 1998. "Why Do Countries Use Capital Controls?," IMF Working Papers 98/181, International Monetary Fund.
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Citations

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Cited by:
  1. Eswar S. Prasad & Raghuram G. Rajan, 2008. "A Pragmatic Approach to Capital Account Liberalization," Journal of Economic Perspectives, American Economic Association, vol. 22(3), pages 149-72, Summer.
  2. Mouhamadou Sy, 2012. "Exchange Rate Regimes, Capital Controls and the Pattern of Speculative Capital Flows," PSE Working Papers halshs-00684591, HAL.
  3. Gerald Epstein, 2009. "Should Financial Flows Be Regulated? Yes," Working Papers 77, United Nations, Department of Economics and Social Affairs.

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