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Do capital controls influence the volume and composition of capital flows? Evidence from the 1990s

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  • Reinhart, Carmen
  • Montiel, Peter

Abstract

In the early 1990s capital flows to the Asian economies were dominated by FDI. By contrast, Latin America was attracting little FDI and a large share of its inflows were either short-term or portfolio and viewed as “hot money.” These differences gave rise to the view that Latin America was more vulnerable to a reversal of capital flows than Asia. Yet, scant attention was given to the fact that as the capital inflows persisted those regional differences were eroding–it took the crises of 1997 to reveal that Asia’s exposure to the vagaries of short-term capital was vast. Here we present cross-country evidence that capital controls influence the composition of flows, if not their volume while policies of sterilized intervention influence both volume and composition, skewing flows to the short end of the maturity spectrum. We conclude that Asia’s increasing reliance on short term flows was, in large part, due to the macroeconomic policy response to the initial surge in capital inflows.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13710.

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Date of creation: Aug 1999
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Publication status: Published in Journal of International Money and Finance 4.18(1999): pp. 619-635
Handle: RePEc:pra:mprapa:13710

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Keywords: capital flows controls exchange rates monetary policy stock prices;

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References

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  1. Chuhan, Punam & Claessens, Stijn & Mamingi, Nlandu, 1998. "Equity and bond flows to Latin America and Asia: the role of global and country factors," Journal of Development Economics, Elsevier, vol. 55(2), pages 439-463, April.
  2. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1994. "The capital inflows problem: Concepts and issues," MPRA Paper 13902, University Library of Munich, Germany.
  3. 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.
  4. Fernandez-Arias, Eduardo & DEC, 1994. "The new wave of private capital inflows : push or pull?," Policy Research Working Paper Series 1312, The World Bank.
  5. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  6. Claessens, S. & Gooptu, S., 1993. "Portfolio Investment in Developing Countries," World Bank - Discussion Papers 228, World Bank.
  7. Dooley, Michael & Fernandez-Arias, Eduardo & Kletzer, Kenneth, 1996. "Is the Debt Crisis History? Recent Private Capital Inflows to Developing Countries," World Bank Economic Review, World Bank Group, vol. 10(1), pages 27-50, January.
  8. Reinhart, Carmen & Dunnaway, Steve, 1996. "Dealing with capital inflows: Are there any lessons?," MPRA Paper 13764, University Library of Munich, Germany.
  9. Corbo, Vittorio & Hernandez, Leonardo, 1994. "Macroeconomic adjustment to capital inflows : Latin American style versus East Asian style," Policy Research Working Paper Series 1377, The World Bank.
  10. Steven Riess Weisbrod & Liliana Rojas-Suárez, 1994. "Financial Market Fragilities in Latin America: From Banking Crisis Resolution to Current Policy Challenges," IMF Working Papers 94/117, International Monetary Fund.
  11. 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.
  12. Reinhart, Carmen & Leiderman, Leonardo, 1994. "Capital inflows to Latin America," MPRA Paper 13406, University Library of Munich, Germany.
  13. Carmen M. Reinhart & Sara Calvo, 1996. "Capital Flows to Latin America: Is There Evidence of Contagion Effects?," Peterson Institute Press: Chapters, in: Guillermo A. Calvo & Morris Goldstein & Eduard Hochreiter (ed.), Private Capital Flows to Emerging Markets After the Mexican Crisis, pages 151-171 Peterson Institute for International Economics.
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Citations

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Cited by:
  1. Pavlos Petroulas, 2007. "Short -Term Capital Flows and Growth in Developed and Emerging Markets," Working Papers 60, Bank of Greece.
  2. Petroulas, Pavlos, 2004. "Short-Term Capital Flows and Growth in Developed and Emerging Markets Pavlos," Research Papers in Economics 2004:4, Stockholm University, Department of Economics.
  3. Edwards, Sebastian, 2007. "Capital controls, capital flow contractions, and macroeconomic vulnerability," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 814-840, September.
  4. Renzo Rossini & Zenon Quispe & Rocío Gondo, 2008. "Macroeconomic implications of capital inflows: Peru 1991–2007," BIS Papers chapters, in: Bank for International Settlements (ed.), Financial globalisation and emerging market capital flows, volume 44, pages 363-387 Bank for International Settlements.
  5. Gregory Connor & Brian O'Kelly, 2010. "Sliding Doors Cost Measurement.A Restrictive Approach to Analyzing the Net Economic Cost of Policy Decisions and an Application to Irish Financial Regulation," Economics, Finance and Accounting Department Working Paper Series n214a-10.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  6. Charles WYPLOSZ, 2001. "How Risky Is Financial Liberalization In The Developing Countries?," G-24 Discussion Papers 14, United Nations Conference on Trade and Development.
  7. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 2001. "Fundamental Determinants of the Asian Crisis: The Role of Financial Fragility and External Imbalances," NBER Chapters, in: Regional and Global Capital Flows: Macroeconomics Causes and Consequences, NBER-EASE Volume 10, pages 11-46 National Bureau of Economic Research, Inc.
  8. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  9. Charles van Marrewijk & Gus Garita, 2008. "Countries of a Feather flock together," Tinbergen Institute Discussion Papers 08-067/2, Tinbergen Institute, revised 19 Sep 2008.
  10. Mahir Binici & Michael M. Hutchison & Martin Schindler, 2009. "Controlling Capital? Legal Restrictions and the Asset Composition of International Financial Flows," IMF Working Papers 09/208, International Monetary Fund.
  11. Graciela L. Kaminsky, 2004. "Flux internationaux de capitaux : bénédiction ou malédiction ?," Revue d’économie du développement, De Boeck Université, vol. 18(3), pages 83-119.
  12. Udaibir S. Das & Michael G. Papaioannou & Christoph Trebesch, 2010. "Sovereign Default Risk and Private Sector Access to Capital in Emerging Markets," IMF Working Papers 10/10, International Monetary Fund.
  13. Odedokun, Matthew, 2003. "The 'Pull' and 'Push' Factors in North-South Private Capital Flows: Conceptual Issues and Empirical Estimates," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  14. Kletzer, Kenneth M., 2000. "The effectiveness of self-protection policies for safeguarding emerging market economies from crises," ZEI Working Papers B 08-2000, ZEI - Center for European Integration Studies, University of Bonn.
  15. Stephanie E. Curcuru & Tomas Dvorak & Francis E. Warnock, 2009. "Decomposing the U.S. External Returns Differential," NBER Working Papers 15077, National Bureau of Economic Research, Inc.
  16. Menzie D. Chinn, 2002. "The Compatability of Capital COntrols and Financial Development: A Selective Survey and Empirical Evidence," Asia Pacific Economic Papers 327, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
  17. Eduardo Fernández-Arias, 2000. "The New Wave of Capital Inflows: Sea Change or Tide?," Research Department Publications 4199, Inter-American Development Bank, Research Department.
  18. Sebastian Edwards, 2008. "Financial Openness, Currency Crises, and Output Losses," NBER Chapters, in: Financial Markets Volatility and Performance in Emerging Markets, pages 97-120 National Bureau of Economic Research, Inc.
  19. Eduardo Fernández-Arias, 2000. "La nueva onda de los flujos de capitales: ¿viraje radical o cambio efímero?," Research Department Publications 4200, Inter-American Development Bank, Research Department.
  20. Andrés VELASCO, 2000. "Exchange-Rate Policies For Developing Countries: What Have We Learned? What Do We Still Not Know?," G-24 Discussion Papers 5, United Nations Conference on Trade and Development.

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