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Why Do Emerging Markets Liberalize Capital Outflow Controls? Fiscal versus Net Capital Flow Concerns

  • Joshua Aizenman
  • Gurnain Pasricha

In this paper, we provide empirical evidence on the factors that motivated emerging economies to change their capital outflow controls in recent decades. Liberalization of capital outflow controls can allow emerging-market economies (EMEs) to reduce net capital inflow (NKI) pressures, but may cost their governments the fiscal revenues that external financial repression generates. Our results indicate that external repression revenues in EMEs declined substantially in the 2000s compared with the 1980s. In line with this decline in external repression revenues and their growth accelerations in the 2000s, concerns related to net capital inflows took predominance over fiscal concerns in the decisions to liberalize capital outflow controls. Overheating and foreign exchange valuation concerns arising from NKI pressures were important, but so were financial stability concerns and concerns about macroeconomic volatility. Emerging markets facing high volatility in net capital inflows and higher short-term balance-sheet exposures liberalized outflows less. Countries eased outflows more in response to higher appreciation pressures in the exchange market, stock market appreciation, real exchange rate volatility, net capital inflows and accumulation of reserves.

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Paper provided by Bank of Canada in its series Working Papers with number 13-21.

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Length: 48 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:bca:bocawp:13-21
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  1. 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.
  2. Michael W. Klein, 2012. "Capital Controls: Gates versus Walls," NBER Working Papers 18526, National Bureau of Economic Research, Inc.
  3. Christoph Trebesch & Michael G Papaioannou & Udaibir S. Das, 2012. "Sovereign Debt Restructurings 1950-2010; Literature Survey, Data, and Stylized Facts," IMF Working Papers 12/203, International Monetary Fund.
  4. Joshua Aizenman & Pablo E. Guidotti, 1990. "Capital Controls, Collection Costs, and Domestic Public Debt," NBER Working Papers 3443, National Bureau of Economic Research, Inc.
  5. Broner, Fernando A & Didier, Tatiana & Erce, Aitor & Schmukler, Sergio, 2011. "Gross Capital Flows: Dynamics and Crises," CEPR Discussion Papers 8591, C.E.P.R. Discussion Papers.
  6. Sebastian Edwards, 2007. "Capital Controls, Sudden Stops, and Current Account Reversals," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 73-120 National Bureau of Economic Research, Inc.
  7. repec:cup:cbooks:9781107401440 is not listed on IDEAS
  8. Joshua Aizenman & Yothin Jinjarak, 2006. "Globalization and Developing Countries - A Shrinking Tax Base?," NBER Working Papers 11933, National Bureau of Economic Research, Inc.
  9. Vittorio Grilli & Gian-Maria Milesi-Ferretti, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Working Papers 95/31, International Monetary Fund.
  10. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
  11. Giovannini, Alberto & de Melo, Martha, 1993. "Government Revenue from Financial Repression," American Economic Review, American Economic Association, vol. 83(4), pages 953-63, September.
  12. Michael M Hutchison & Gurnain Kaur Pasricha & Nirvikar Singh, 2012. "Effectiveness of Capital Controls in India: Evidence from the Offshore NDF Market," IMF Economic Review, Palgrave Macmillan, vol. 60(3), pages 395-438, September.
  13. Ila Patnaik & Ajay Shah, 2012. "Did the Indian Capital Controls Work as a Tool of Macroeconomic Policy?," IMF Economic Review, Palgrave Macmillan, vol. 60(3), pages 439-464, September.
  14. Patnaik, Ila & Shah, Ajay, 2011. "Did the Indian capital controls work as a tool of macroeconomic policy?," Working Papers 11/87, National Institute of Public Finance and Policy.
  15. Reinhart, Carmen & Kirkegaard, Jacob & Sbrancia, Belen, 2011. "Financial repression redux," MPRA Paper 31641, University Library of Munich, Germany.
  16. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
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