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Did the Indian Capital Controls Work as a Tool of Macroeconomic Policy?

  • Ila Patnaik
  • Ajay Shah

The present debate over capital controls emphasizes their potential role as tools for macroeconomic and financial stability. The effectiveness of these tools may depend on whether a country has the legal and administrative machinery to implement capital controls. This paper contributes to the analysis of the costs and benefits of capital controls by studying the experience of India, a country that has a system of capital controls that had never been dismantled. The paper finds that when the capital controls were used as tools of macroeconomic policy, during a capital surge, the Indian experience appears to be similar to that of other countries.

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Article provided by Palgrave Macmillan in its journal IMF Economic Review.

Volume (Year): 60 (2012)
Issue (Month): 3 (September)
Pages: 439-464

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Handle: RePEc:pal:imfecr:v:60:y:2012:i:3:p:439-464
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  1. Patnaik, Ila & Shah, Ajay, 2009. "The difficulties of the Chinese and Indian exchange rate regimes," Working Papers 09/62, National Institute of Public Finance and Policy.
  2. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
  3. Patnaik, Ila & Shah, Ajay, 2010. "Does the currency regime shape unhedged currency exposure?," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 760-769, September.
  4. Guonan Ma & Corrinne Ho & Robert N McCauley, 2004. "The markets for non-deliverable forwards in Asian currencies," BIS Quarterly Review, Bank for International Settlements, June.
  5. Anton Korinek, 2011. "The New Economics of Capital Controls Imposed for Prudential Reasons+L4888," IMF Working Papers 11/298, International Monetary Fund.
  6. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
  7. Ila Patnaik & Ajay Shah, 2010. "Why India choked when Lehman broke," Finance Working Papers 22974, East Asian Bureau of Economic Research.
  8. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
  9. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973, April.
  10. Ajay Shah & Ila Patnaik & Anmol Sethy & Vimal Balasubramaniam, 2010. "The Exchange Rate Regime in Asia: From Crisis to Crisis," Working Papers id:2582, eSocialSciences.
  11. Akira Ariyoshi & Andrei Kirilenko & Inci Ötker & Bernard Laurens & Jorge Iván Canales Kriljenko & Karl Friedrich Habermeier, 2000. "Capital Controls; Country Experiences with Their Use and Liberalization," IMF Occasional Papers 190, International Monetary Fund.
  12. Enrica Detragiache & Abdul Abiad & Thierry Tressel, 2008. "A New Database of Financial Reforms," IMF Working Papers 08/266, International Monetary Fund.
  13. Prasad, Eswar, 2009. "India's Approach to Capital Account Liberalization," IZA Discussion Papers 3927, Institute for the Study of Labor (IZA).
  14. Nicolas E. Magud E. & Carmen M. & Kenneth S. Rogoff, 2011. "Capital Controls: Myth and Reality--A Portfolio Balance Approach," Working Paper Series WP11-7, Peterson Institute for International Economics.
  15. Selim Elekdag & M. Ayhan Kose & Roberto Cardarelli, 2009. "Capital Inflows; Macroeconomic Implications and Policy Responses," IMF Working Papers 09/40, International Monetary Fund.
  16. Mahmood Pradhan & Ravi Balakrishnan & Reza Baqir & Geoffrey Heenan & Sylwia Nowak & Ceyda Oner & Sanjaya Panth, 2011. "Policy Responses to Capital Flows in Emerging Markets," IMF Staff Discussion Notes 11/10, International Monetary Fund.
  17. Michael Hutchison & Gurnain Kaur Pasricha & Nirvikar Singh, 2011. "Effectiveness of Capital Controls in India: Evidence from the Offshore NDF Market," Working Papers 11-29, Bank of Canada.
  18. Chikako Baba & Annamaria Kokenyne, 2011. "Effectiveness of Capital Controls in Selected Emerging Markets in the 2000's," IMF Working Papers 11/281, International Monetary Fund.
  19. Dennis Quinn & Martin Schindler & A Maria Toyoda, 2011. "Assessing Measures of Financial Openness and Integration," IMF Economic Review, Palgrave Macmillan, vol. 59(3), pages 488-522, August.
  20. Ajay Shah & Ila Patnaik, 2007. "India's Experience with Capital Flows: The Elusive Quest for a Sustainable Current Account Deficit," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 609-644 National Bureau of Economic Research, Inc.
  21. Jonathan D Ostry & Atish R Ghosh & Marcos Chamon & Mahvash S Qureshi, 2011. "Capital Controls: When and Why?," IMF Economic Review, Palgrave Macmillan, vol. 59(3), pages 562-580, August.
  22. Levy Yeyati, Eduardo & Schmukler, Sergio L. & Van Horen, Neeltje, 2009. "International financial integration through the law of one price: The role of liquidity and capital controls," Journal of Financial Intermediation, Elsevier, vol. 18(3), pages 432-463, July.
  23. Chang, Roberto & Velasco, Andres, 2006. "Currency mismatches and monetary policy: A tale of two equilibria," Journal of International Economics, Elsevier, vol. 69(1), pages 150-175, June.
  24. Zeileis, Achim & Shah, Ajay & Patnaik, Ila, 2010. "Testing, monitoring, and dating structural changes in exchange rate regimes," Computational Statistics & Data Analysis, Elsevier, vol. 54(6), pages 1696-1706, June.
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