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How Effective are Capital Controls? Evidence from Malaysia

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  • Prema-chandra Athukorala

    ()

  • Juthathip Jongwanich

Abstract

This paper examines the role of capital controls as a macroeconomic policy tool in light of the Malaysian experience. It consists of an econometric analysis of quarterly data over the period 1990–2010 using newly constructed capital inflow and outflow policy indexes as well as analytical narratives of episodes of controls imposed on inflows (1994) and outflows (1998–1999). The findings suggest that well-targeted controls have the potential to tame both short-term capital inflows and outflows without exerting a backwash effect on foreign direct investment, at least in the short to medium term. Controls on capital inflows introduced in the first half of 1994 helped moderate accumulation of short-term capital flows, particularly short-term bank credit. During 1998–1999, carefully designed temporary capital controls were successful in providing Malaysian policymakers a viable setting for applying the standard Keynesian therapy.

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Bibliographic Info

Paper provided by The Australian National University, Arndt-Corden Department of Economics in its series Departmental Working Papers with number 2012-16.

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Length: 55
Date of creation: 2012
Date of revision:
Handle: RePEc:pas:papers:2012-16

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Keywords: Malaysia; Capital controls; financial crisis;

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  1. Kaplan, Ethan & Rodrik, Dani, 2001. "Did the Malaysian Capital Controls Work?," Working Paper Series rwp01-008, Harvard University, John F. Kennedy School of Government.
  2. Binici, Mahir & Hutchison, Michael & Schindler, Martin, 2010. "Controlling capital? Legal restrictions and the asset composition of international financial flows," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 666-684, June.
  3. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
  4. Montiel, Peter & Reinhart, Carmen M., 1999. "Do capital controls and macroeconomic policies influence the volume and composition of capital flows? Evidence from the 1990s," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 619-635, August.
  5. Akira Ariyoshi & Andrei Kirilenko & Inci Ötker & Bernard Laurens & Jorge Iván Canales Kriljenko & Karl Friedrich Habermeier, 2000. "Capital Controls," IMF Occasional Papers 190, International Monetary Fund.
  6. Mody, Ashoka & Murshid, Antu Panini, 2005. "Growing up with capital flows," Journal of International Economics, Elsevier, vol. 65(1), pages 249-266, January.
  7. Prema-chandra Athukorala, 2010. "Malaysian Economy in Three Crises," Departmental Working Papers 2010-12, The Australian National University, Arndt-Corden Department of Economics.
  8. Anne Krueger & Aaron Tornell, 1999. "The Role of Bank Restructuring in Recovering from Crises: Mexico 1995-98," NBER Working Papers 7042, National Bureau of Economic Research, Inc.
  9. Prema-chandra Athukorala, 2003. "FDI in Crisis and Recovery: Lessons from the 1997-98 Asian Crisis," Departmental Working Papers 2003-04, The Australian National University, Arndt-Corden Department of Economics.
  10. Edison, Hali & Reinhart, Carmen M., 2001. "Stopping hot money," Journal of Development Economics, Elsevier, vol. 66(2), pages 533-553, December.
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