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Capital Controls: Gates versus Walls

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  • Michael W. Klein

    (Tufts University)

Abstract

This paper examines the pattern of controls on capital inflows, and the association of these controls on financial variables, GDP, and exchange rates. A key point of the paper is the distinction between long-standing controls on a broad range of assets (walls) and episodic controls that are imposed and removed, and tend to be on a narrower set of assets (gates). The paper presents a new data set that differentiates between controls on different categories of assets for a set of 44 advanced and emerging market economies over the 1995 to 2010 period. The imposition of episodic controls is found to not follow the prescriptions of theories that suggest first imposing controls on international asset inflows that are most likely to contribute to financial vulnerability. Estimates show significant differences in the partial correlations of long-standing and episodic controls with the growth of financial variables and with GDP growth, but these differences seem to arise because countries with long-standing controls are poorer than the other countries in the sample. With a few exceptions, there is little evidence of the efficacy of capital controls on the growth of financial variables, the real exchange rate, or GDP growth at an annual frequency. These preliminary results raise doubts about assumptions behind recent calls for a greater use of episodic controls on capital inflows.
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Suggested Citation

  • Michael W. Klein, 2012. "Capital Controls: Gates versus Walls," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 317-367.
  • Handle: RePEc:bin:bpeajo:v:43:y:2012:i:2012-02:p:317-367
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    References listed on IDEAS

    as
    1. Obstfeld, Maurice, 1994. "Risk-Taking, Global Diversification, and Growth," American Economic Review, American Economic Association, vol. 84(5), pages 1310-1329, December.
    2. Forbes, Kristin J. & Warnock, Francis E., 2012. "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, Elsevier, vol. 88(2), pages 235-251.
    3. De Gregorio, Jose & Edwards, Sebastian & Valdes, Rodrigo O., 2000. "Controls on capital inflows: do they work?," Journal of Development Economics, Elsevier, vol. 63(1), pages 59-83, October.
    4. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476.
    5. Lawrence H. Summers, 2000. "International Financial Crises: Causes, Prevention, and Cures," American Economic Review, American Economic Association, pages 1-16.
    6. Olivier Jeanne & Arvind Subramanian & John Williamson, 2012. "Who Needs to Open the Capital Account?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 5119.
    7. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 301-352.
    8. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
    9. Jonathan David Ostry & Atish R. Ghosh & Karl F Habermeier & Marcos d Chamon & Mahvash S Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows; The Role of Controls," IMF Staff Position Notes 2010/04, International Monetary Fund.
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    More about this item

    Keywords

    captial inflows; GDP; exchange rates;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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