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The Political Economy of Capital Controls

Author

Listed:
  • A Alesina
  • V Grilli
  • G Milesi-Feretti

Abstract

This paper studies the institutional and political determinants of capital controls in a sample of 20 OECD countries for the period 1950-1989. One of the most interesting results is that capital controls are more likely too be imposed by strong governments which have a relatively "free" hand over monetary policy, because the Central Bank is not very independent. By imposing capital controls, the governments raise more seigniorage revenue and keep interest rates artificially low. As a result, public debt accumulates at a slower rate than otherwise. This suggests that an institutional reform which makes the Central Bank more independent makes it more difficult for the government to finance its budget. The tightening of the fiscal constraint may force the government to adjust towards a more sound fiscal policy. We also found that, as expected and in accordance with the theory, capital controls are more likely to be introduced when the exchange rate is pegged or managed. On the contrary, we found no effects of capital controls on growth: we reject rather strongly the hypothesis that capital controls reduce growth.

Suggested Citation

  • A Alesina & V Grilli & G Milesi-Feretti, 1993. "The Political Economy of Capital Controls," CEP Discussion Papers dp0169, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp0169
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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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