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Capital controls as shock absorbers

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  • Ben Zeev, Nadav

Abstract

The recent global financial crisis has resuscitated the debate on the relevance of capital controls as effective policy instruments. This paper contributes to this debate by studying the shock-absorbing capacity of capital controls. Using a recently developed capital control dataset for a panel of 33 emerging market economies, I show that output in economies with stricter capital inflow controls responds significantly less to global credit supply shocks, whereas capital outflow controls have no significant shock-absorbing capacity. Leverage is significantly lower in economies enacting stricter capital inflow controls, suggesting that financial frictions play a role in driving the shock-absorbing capacity of inflow controls.

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  • Ben Zeev, Nadav, 2017. "Capital controls as shock absorbers," Journal of International Economics, Elsevier, vol. 109(C), pages 43-67.
    • Handle: RePEc:eee:inecon:v:109:y:2017:i:c:p:43-67
    DOI: 10.1016/j.jinteco.2017.08.004
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    2. Scheubel, Beatrice & Stracca, Livio & Tille, Cédric, 2019. "The global financial cycle and capital flow episodes: a wobbly link?," Working Paper Series 2337, European Central Bank.
    3. Julien Acalin & Alessandro Rebucci, 2020. "Global Business and Financial Cycles: A Tale of Two Capital Account Regimes," NBER Working Papers 27739, National Bureau of Economic Research, Inc.
    4. Chokri Zehri & Zagros Madjd‐Sadjadi, 2024. "Capital flow management and monetary policy to control credit growth," Economics and Politics, Wiley Blackwell, vol. 36(2), pages 637-676, July.
    5. Johannes Matschke, 2021. "Macroprudential Policy Interlinkages," Research Working Paper RWP 21-10, Federal Reserve Bank of Kansas City.
    6. Fabiani, Andrea & López-Piñeros, Martha & Peydró, José-Luis & Soto, Paul E., 2022. "Capital Controls, Domestic Macroprudential Policy and the Bank Lending Channel of Monetary Policy," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 139(November ), pages 1-1.
    7. Nie,Owen, 2020. "The Information Content of Capital Controls," Policy Research Working Paper Series 9343, The World Bank.
    8. Alessandro Rebucci & Chang Ma, 2019. "Capital Controls: A Survey of the New Literature," NBER Working Papers 26558, National Bureau of Economic Research, Inc.
    9. Katharina Bergant & Francesco Grigoli & Niels‐Jakob Hansen & Damiano Sandri, 2024. "Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(6), pages 1405-1438, September.
    10. Norring, Anni, 2022. "Taming the tides of capital: Review of capital controls and macroprudential policy in emerging economies," BoF Economics Review 1/2022, Bank of Finland.
    11. Nadav Ben Zeev, 2019. "Asymmetric Business Cycles In Emerging Market Economies," Working Papers 1909, Ben-Gurion University of the Negev, Department of Economics.
    12. Ouyang, Alice Y. & Guo, Shen, 2019. "Macro-prudential policies, the global financial cycle and the real exchange rate," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 147-167.
    13. Aldasoro, Iñaki & Beltrán, Paula & Grinberg, Federico & Mancini-Griffoli, Tommaso, 2023. "The macro-financial effects of international bank lending on emerging markets," Journal of International Economics, Elsevier, vol. 142(C).
    14. Ferrero, Andrea & Habib, Maurizio Michael & Stracca, Livio & Venditti, Fabrizio, 2022. "Leaning against the global financial cycle," Working Paper Series 2763, European Central Bank.
    15. Sandri, Damiano & Bergant, Katharina & Grigoli, Francesco & Hansen, Niels-Jakob, 2020. "Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)?," CEPR Discussion Papers 14948, C.E.P.R. Discussion Papers.
    16. Javier Bianchi & Guido Lorenzoni, 2021. "The Prudential Use of Capital Controls and Foreign Currency Reserves," NBER Working Papers 29476, National Bureau of Economic Research, Inc.
    17. Yang Zhou & Shigeto Kitano, 2022. "Effectiveness of Capital Controls: Gates versus Walls," Discussion Paper Series DP2022-38, Research Institute for Economics & Business Administration, Kobe University, revised Apr 2023.
    18. Seung-Gwan Baek & Chi-Young Song, 2019. "What Drives Stops in Cross-Border Bond Flows?," Sustainability, MDPI, vol. 11(14), pages 1-21, July.
    19. Zhitao Lin & Jinzhao Chen & Xingwang Qian, 2022. "Capital controls and the volatility of the renminbi covered interest deviation," Review of International Economics, Wiley Blackwell, vol. 30(1), pages 205-236, February.
    20. Nie, Owen, 2022. "The information content of capital controls," Journal of International Money and Finance, Elsevier, vol. 127(C).
    21. Nadav Ben Zeev, 2017. "Exchange Rate Regimes And Sudden Stops," Working Papers 1712, Ben-Gurion University of the Negev, Department of Economics.
    22. Loipersberger, Florian & Matschke, Johannes, 2022. "Financial cycles and domestic policy choices," European Economic Review, Elsevier, vol. 143(C).
    23. Andrea Fabiani & Martha López Piñeros & José-Luis Peydró & Paul E. Soto, 2021. "Capital controls, corporate debt and real effects," Economics Working Papers 1833, Department of Economics and Business, Universitat Pompeu Fabra.
    24. Wang, Jian & Wu, Jason, 2021. "Is capital flow management effective? Evidence based on U.S. monetary policy shocks," Journal of International Money and Finance, Elsevier, vol. 118(C).

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    More about this item

    Keywords

    Capital controls; Credit supply shocks; Emerging market economies;
    All these keywords.

    JEL classification:

    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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