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Are price-based capital account regulations effective in developing countries ?

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  • David, Antonio C.

Abstract

The author evaluates the effectiveness of policy measures adopted by Chile and Colombia, aiming to mitigate the deleterious effects of pro-cyclical capital flows. In the case of Chile, according to his Generalized Method of Moments (GMM) analysis, capital controls succeeded in reducing net short-term capital flows but did not affect long-term flows. As far as Colombia is concerned, the regulations were capable of affecting total flows and also long-term ones. In addition, the co-integration models indicate that the regulations did not have a direct effect on the real exchange rate in the Chilean case. Nonetheless, the model used for Colombia did detect a direct impact of the capital controls on the real exchange rate. Therefore, the results do not seem to support the idea that those regulations were easily evaded.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4175.

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Date of creation: 01 Mar 2007
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Handle: RePEc:wbk:wbrwps:4175

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Keywords: Macroeconomic Management; Capital Flows; Economic Theory&Research; Economic Stabilization; Financial Economics;

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References

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  1. Pesaran, M. Hashem & Shin, Yongcheol & Smith, Richard J., 2000. "Structural analysis of vector error correction models with exogenous I(1) variables," Journal of Econometrics, Elsevier, Elsevier, vol. 97(2), pages 293-343, August.
  2. Antonio David, 2005. "Do controls on capital inflows insulate domestic variables against external shocks?," Money Macro and Finance (MMF) Research Group Conference 2005, Money Macro and Finance Research Group 9, Money Macro and Finance Research Group.
  3. José Antonio Ocampo & Camilo Ernesto Tovar, 1999. "Price-based capital account regulations: the Colombian experience," DOCUMENTOS DE INVESTIGACION 003372, CEPAL NACIONES UNIDAS.
  4. Forbes, Kristin J., 2007. "One cost of the Chilean capital controls: Increased financial constraints for smaller traded firms," Journal of International Economics, Elsevier, Elsevier, vol. 71(2), pages 294-323, April.
  5. Sebastian Edwards, 1999. "How Effective Are Capital Controls?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 13(4), pages 65-84, Fall.
  6. Mark Gertler & Cara S. Lown, 2000. "The Information in the High Yield Bond Spread for the Business Cycle: Evidence and Some Implications," NBER Working Papers 7549, National Bureau of Economic Research, Inc.
  7. De Gregorio, Jose & Edwards, Sebastian & Valdes, Rodrigo O., 2000. "Controls on capital inflows: do they work?," Journal of Development Economics, Elsevier, Elsevier, vol. 63(1), pages 59-83, October.
  8. Tito Cordella, 1998. "Can Short-Term Capital Controls Promote Capital Inflows?," IMF Working Papers 98/131, International Monetary Fund.
  9. Ashoka Mody & Mark P. Taylor, 2002. "International Capital Crunches," IMF Working Papers 02/43, International Monetary Fund.
  10. Francisco Gallego & Leonardo Hernández & Klaus Schmidt-Hebbel, 2002. "Capital Controls in Chile: Were They Effective?," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 12, pages 361-412 Central Bank of Chile.
  11. Hernán Rincón, 1999. "Efectividad Del Control A Los Flujos De Capital: Un Reexamen Empírico De La Experiencia Reciente Reciente En Colombia," BORRADORES DE ECONOMIA 002412, BANCO DE LA REPÚBLICA.
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Cited by:
  1. 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.
  2. David, Antonio C., 2007. "Controls on capital inflows and external shocks," Policy Research Working Paper Series 4176, The World Bank.

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