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

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  • Bruno Coelho
  • Kevin Gallagher

Abstract

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.�

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Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp213.

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Date of creation: 2010
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Handle: RePEc:uma:periwp:wp213

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  1. Nicolas Magud & Carmen M. Reinhart, 2005. "Capital Controls: An Evaluation," University of Oregon Economics Department Working Papers 2005-19, University of Oregon Economics Department.
    • 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.
  2. Edison, Hali & Reinhart, Carmen M., 2001. "Stopping hot money," Journal of Development Economics, Elsevier, vol. 66(2), pages 533-553, December.
  3. 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.
  4. Concha, Alvaro & Galindo, Arturo José & Vasquez, Diego, 2011. "An assessment of another decade of capital controls in Colombia: 1998–2008," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(4), pages 319-338.
  5. Edwards, Sebastian & Rigobon, Roberto, 2009. "Capital controls on inflows, exchange rate volatility and external vulnerability," Journal of International Economics, Elsevier, vol. 78(2), pages 256-267, July.
  6. Jose De Gregorio & Sebastian Edwards & Rodrigo O. Valdes, 2000. "Controls on Capital Inflows: Do they Work?," NBER Working Papers 7645, National Bureau of Economic Research, Inc.
  7. M. Ayhan Kose & Kenneth Rogoff & Eswar Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries: Some Empirical Evidence," IMF Occasional Papers 220, International Monetary Fund.
  8. Kose, M. Ayhan & Prasad, Eswar & Taylor, Ashley D., 2009. "Thresholds in the Process of International Financial Integration," IZA Discussion Papers 4133, Institute for the Study of Labor (IZA).
  9. 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.
  10. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
  11. 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.
  12. Benedict J. Clements & Herman Kamil, 2009. "Are Capital Controls Effective in the 21st Century? The Recent Experience of Colombia," IMF Working Papers 09/30, International Monetary Fund.
  13. Ilene Grabel, 2003. "Averting crisis? Assessing measures to manage financial integration in emerging economies," Cambridge Journal of Economics, Oxford University Press, vol. 27(3), pages 317-336, May.
  14. Villar Leonardo, 2010. "Latin America: Comments on Financial Regulation and International Capital Flows in Latin America," Journal of Globalization and Development, De Gruyter, vol. 1(1), pages 1-12, January.
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Cited by:
  1. Juan Antonio Montecino & Jose Antonio Cordero, 2010. "Capital Controls and Monetary Policy in Developing Countries," CEPR Reports and Issue Briefs 2010-10, Center for Economic and Policy Research (CEPR).
  2. Matthew S. Yiu, 2011. "The Effect of Capital Flow Management Measures in Five Asian Economies on the Foreign Exchange Market," Working Papers 412011, Hong Kong Institute for Monetary Research.
  3. Chikako Baba & Annamaria Kokenyne, 2011. "Effectiveness of Capital Controls in Selected Emerging Markets in the 2000s," IMF Working Papers 11/281, International Monetary Fund.
  4. Jorg Bibow, 2011. "Permanent and Selective Capital Account Management Regimes as an Alternative to Self-Insurance Strategies in Emerging-market Economies," Economics Working Paper Archive wp_683, Levy Economics Institute, The.
  5. Kevin Gallagher, 2011. "Regaining Control? Capital Controls and the Global Financial Crisis," Working Papers wp250, Political Economy Research Institute, University of Massachusetts at Amherst.
  6. Abhijit Sen Gupta, 2010. "Management of International Capital Flows: The Indian Experience," Competence Centre on Money, Trade, Finance and Development 1003, Hochschule fuer Technik und Wirtschaft, Berlin.
  7. United Nations ESCAP, 2012. "Dealing with protectionist pressures," STUDIES IN TRADE AND INVESTMENT, in: Asia-Pacific Trade and Investment Report 2012: Recent Trends and Developments, chapter 5, pages 79-101 United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
  8. Mukherjee, Sanchita, 2011. "Does the level of capital openness explain “fear of floating” amongst the inflation targeting countries?," MPRA Paper 30289, University Library of Munich, Germany.
  9. Karl Friedrich Habermeier & Annamaria Kokenyne & Chikako Baba, 2011. "The Effectiveness of Capital Controls and Prudential Policies in Managing Large Inflows," IMF Staff Discussion Notes 11/14, International Monetary Fund.
  10. Taro Esaka & Shinji Takagi, 2012. "Testing the Effectiveness of Market-Based Controls: Evidence from the Experience of Japan with Short-Term Capital Flows in the 1970s," Discussion Papers in Economics and Business 12-03, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).

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