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Capital controls, capital flow contractions, and macroeconomic vulnerability

  • Edwards, Sebastian

In this paper I analyze whether restrictions to capital mobility reduce vulnerability to external shocks. More specifically, I ask if countries that restrict the free flow of international capital have a lower probability of experiencing a large contraction in net capital flows. I use three new indexes on the degree of international financial integration and a large multi-country data set for 1970-2004 to estimate a series of random-effect probit equations. I find that the marginal effect of higher capital mobility on the probability of a capital flow contraction is positive and statistically significant, but very small. Having a flexible exchange rate greatly reduces the probability of experiencing a capital flow contraction. The benefits of flexible rates increase as the degree of capital mobility increases. A higher current account deficit increases the probability of a capital flow contraction, while a higher ratio of FDI to GDP reduces that probability.

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

Volume (Year): 26 (2007)
Issue (Month): 5 (September)
Pages: 814-840

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Handle: RePEc:eee:jimfin:v:26:y:2007:i:5:p:814-840
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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