Capital Controls and 21st Century Financial Crises: Evidence from Colombia and Thailand

In the run up to the financial crisis of 2007-2009 many developing nations fell victim to massive inflows of capital, capital that their financial systems found difficult to absorb. One of a number of policy options to respond to such inflows is unremunerated reserve requirements (URR). Two countries, Colombia and Thailand, deployed URR in the second half of the decade. This paper analyses the extent to which those URRs were successful in reducing the overall level and composition of capital inflows, reducing exchange rate appreciation and volatility, stemming asset bubbles, and granting more independence for monetary policy. We find that URRs were modestly successful in Colombia and Thailand, though Thailand was less of a success than Colombia. In Colombia the controls were able to reduce the overall volume of inflows and stem asset bubbles. In Thailand, the URR did reduce the overall volume of flows, and the announcement of the URR caused a sharp drop in asset prices. However, in both cases the controls were linked to exchange rate volatility and in Thailand asset prices recovered their upward trend the day after the announcement. The results in this paper demonstrate that on the there is still a role for capital controls in the 21st century, but such controls should be more sophisticated than in years past.