Capital Controls and Electoral Cycles

This paper studies the relation between the evolution of capital controls and electoral cycles. We exploit a dataset containing detailed information on the level of restrictions on capital flows for 98 countries on an annual basis from 1995 to 2015, constructed by Fernandez et al. (IMF Econ Rev 64:548–574, 2016). First, we find that restrictions are more likely to increase during an election year. The relationship between changes in capital controls and elections is more robust than with any other economic variable. Second, these changes are driven predominantly by restrictions on capital outflows and on relatively liquid asset categories. Third, changes occur mostly after elections, though not exclusively. Finally, capital controls increase more if the new government is more leftist or less liberal than its predecessor, and greater electoral uncertainty is related to higher restrictions on capital flows. Overall, these results suggest that theories examining the cyclical properties of capital controls should also consider electoral cycles.