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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. Fernandez-Arias, Eduardo & DEC, 1994. "The new wave of private capital inflows : push or pull?," Policy Research Working Paper Series 1312, The World Bank.
  3. Steven Riess Weisbrod & Liliana Rojas-Suárez, 1994. "Financial Market Fragilities in Latin America," IMF Working Papers 94/117, International Monetary Fund.
  4. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  5. Claessens, S. & Gooptu, S., 1993. "Portfolio Investment in Developing Countries," World Bank - Discussion Papers 228, World Bank.
  6. 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.
  7. Dooley, Michael & Fernandez-Arias, Eduardo & Kletzer, Kenneth & DEC, 1994. "Is the debt crisis history? Recent private capital inflows to developing countries," Policy Research Working Paper Series 1327, The World Bank.
  8. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1994. "The capital inflows problem: Concepts and issues," MPRA Paper 13902, University Library of Munich, Germany.
  9. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Harvard Institute of Economic Research Working Papers 1759, Harvard - Institute of Economic Research.
  10. 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.
  11. Carmen Reinhart & Guillermo Calvo & Leonardo Leiderman, 1992. "Capital Inflows to Latin America," IMF Working Papers 92/85, International Monetary Fund.
  12. Reinhart, Carmen & Reinhart, Vincent, 1999. "On the use of reserve requirements in dealing with capital flow problems," MPRA Paper 13703, University Library of Munich, Germany.
  13. 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.
  14. Reinhart, C.M. & Dunaway, S., 1996. "Dealing with Capital Inflows. Are There Any Lessons?," Research Paper 28, World Institute for Development Economics Research.
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