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Capital controls, capital flows, and banking crises

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  • Chang, Chia-Ying

Abstract

Capital controls have been adopted by emerging economies to change the volume and the composition of capital flows and to protect the economy from sudden stops. The effectiveness measured by empirical studies has remained inconclusive, due to the limitation of the available data. This paper adopts a theoretical model to examine whether capital controls could achieve these goals effectively. Consequently, this paper finds that capital controls on outflows and inflows may not achieve the goals on changing the volume and the composition of capital flows and on protecting the economy from banking crises and sudden stops. To be more specific, controls on capital outflows and inflows could change the volume of capital flows at the time when the controls are imposed. However, the ability of capital controls on changing composition of capital flows and to protect the country from banking crises and sudden stops is limited, regardless of symmetric or asymmetric controls across countries. It is concluded that capital controls may not be the way to protect the economy from sudden stops. It is overcoming the liquidity problems and offering affordable rates, rather than competitive rates, that are crucial to protect the economy from crises and sudden stops.

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File URL: http://researcharchive.vuw.ac.nz/handle/10063/2979
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Bibliographic Info

Paper provided by Victoria University of Wellington, School of Economics and Finance in its series Working Paper Series with number 2979.

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Date of creation: 2013
Date of revision:
Handle: RePEc:vuw:vuwecf:2979

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Postal: Alice Fong, Administrator, School of Economics and Finance, Victoria Business School, Victoria University of Wellington, PO Box 600 Wellington, New Zealand
Phone: +64 (4) 463-5353
Fax: +64 (4) 463-5014
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Web page: http://www.victoria.ac.nz/sef
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Related research

Keywords: International capital flows; Bank runs; Banking crises; Capital controls;

References

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  1. Nicolas E. Magud E. & Carmen M. & Kenneth S. Rogoff, 2011. "Capital Controls: Myth and Reality--A Portfolio Balance Approach," Working Paper Series WP11-7, Peterson Institute for International Economics.
  2. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  4. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1994. "The Financial Accelerator and the Flight to Quality," NBER Working Papers 4789, National Bureau of Economic Research, Inc.
  5. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
  6. Diamond, Douglas W & Dybvig, Philip H, 1986. "Banking Theory, Deposit Insurance, and Bank Regulation," The Journal of Business, University of Chicago Press, vol. 59(1), pages 55-68, January.
  7. 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.
  8. Natalia T. Tamirisa & Simon Johnson & Kalpana Kochhar & Todd Mitton, 2006. "Malaysian Capital Controls: Macroeconomics and Institutions," IMF Working Papers 06/51, International Monetary Fund.
  9. Sebastian Edwards & Márcio G. P. Garcia, 2008. "Financial Markets Volatility and Performance in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number edwa05-1, octubre-d.
  10. Barry Eichengreen, 2004. "Capital Flows and Crises," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262550598.
  11. Nicolas Magud & Carmen M. Reinhart, 2006. "Capital Controls: An Evaluation," NBER Working Papers 11973, National Bureau of Economic Research, Inc.
    • 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.
  12. Edwards, Sebastian, 2009. "Sequencing of reforms, financial globalization, and macroeconomic vulnerability," Journal of the Japanese and International Economies, Elsevier, vol. 23(2), pages 131-148, June.
  13. Sebastian Edwards, 2008. "Sequencing of Reforms, Financial Globalization, and Macroeconomic Vulnerability," NBER Working Papers 14384, National Bureau of Economic Research, Inc.
  14. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834.
  15. Chang, Chia-Ying, 2013. "Banking crises, sudden stops, and the effectiveness of short-term lending," Working Paper Series 2982, Victoria University of Wellington, School of Economics and Finance.
  16. Sebastian Edwards, 2004. "Financial Openness, Sudden Stops and Current Account Reversals," NBER Working Papers 10277, National Bureau of Economic Research, Inc.
  17. Nobuhiro Kiyotaki & John Moore, 2002. "Balance-Sheet Contagion," American Economic Review, American Economic Association, vol. 92(2), pages 46-50, May.
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