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Do capital controls and macroeconomic policies influence the volume and composition of capital flows? Evidence from the 1990s

  • Montiel, Peter
  • Reinhart, Carmen M.

In the early 1990s capital flows to the Asian economies were dominated by FDI. By contrast, Latin America was attracting little FDI and a large share of its inflows were either short-term or portfolio and viewed as “hot money.” These differences gave rise to the view that Latin America was more vulnerable to a reversal of capital flows than Asia. Yet, scant attention was given to the fact that as the capital inflows persisted those regional differences were eroding–it took the crises of 1997 to reveal that Asia’s exposure to the vagaries of short-term capital was vast. Here we present cross-country evidence that capital controls influence the composition of flows, if not their volume while policies of sterilized intervention influence both volume and composition, skewing flows to the short end of the maturity spectrum. We conclude that Asia’s increasing reliance on short term flows was, in large part, due to the macroeconomic policy response to the initial surge in capital inflows.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 18 (1999)
Issue (Month): 4 (August)
Pages: 619-635

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Handle: RePEc:eee:jimfin:v:18:y:1999:i:4:p:619-635
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  1. Jeffrey D. Sachs & Aaron Tornell & Andrés Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 147-216.
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  8. Steven Riess Weisbrod & Liliana Rojas-Suárez, 1994. "Financial Market Fragilities in Latin America; From Banking Crisis Resolution to Current Policy Challenges," IMF Working Papers 94/117, International Monetary Fund.
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  20. 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.
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