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The Compatability of Capital COntrols and Financial Development: A Selective Survey and Empirical Evidence

  • Menzie D. Chinn

This paper examines the relationship between capital controls and financial development, with an emphasis on the empirical aspects of the linkage. Financial development is interpreted broadly as increasing the efficiency of allocating financial resources and monitoring capital projects. In empirical terms, this translates into an increasing volume of bank intermediation and an increasing role for equity capital. Hence, this paper investigates a substantially broader set of proxy measures of financial development than has heretofore been analysed. Moreover, in addition to the IMF’s measures of exchange restrictions, the Quinn (1997) index of financial openness is used as a measure of capital controls. The econometric results suggest that the rate of financial development, as measured by private credit creation and stock market activity, is linked to the existence of capital controls. However, the strength of this relationship varies with the empirical measure used and the level of economic development. Equity market activity appears to be linked to capital controls in both the full sample and in a restricted sample of developing countries. The possibilities for work at a more disaggregate level on banking and equity markets are also discussed. The results pertaining to equity market development are particularly important, as recent work suggests that new technologies may not be effectively supported by bank-directed finance.

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File URL: https://crawford.anu.edu.au/pdf/pep/pep-327.pdf
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Paper provided by Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University in its series Asia Pacific Economic Papers with number 327.

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Length: 26 pages
Date of creation: May 2002
Date of revision:
Handle: RePEc:csg:ajrcau:327
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  1. Menzie D. Chinn & Michael P. Dooley & Sona Shrestha, 1999. "Latin America and East Asia in the Context of an Insurance Model of Currency Crises," NBER Working Papers 7091, National Bureau of Economic Research, Inc.
  2. Peter Blair Henry, 2000. "Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices," Journal of Finance, American Finance Association, vol. 55(2), pages 529-564, 04.
  3. Menzie D. Chinn & William F. Maloney, 1996. "Financial and Capital Account Liberalization in the Pacific Basin: Korea and Taiwan during the 1980's," NBER Working Papers 5814, National Bureau of Economic Research, Inc.
  4. Levine, Ross & Loayza, Norman & Beck, Thorsten, 2000. "Financial intermediation and growth: Causality and causes," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 31-77, August.
  5. Mark M. Spiegel, 2001. "Financial development and growth: are the APEC nations unique?," Pacific Basin Working Paper Series 2001-04, Federal Reserve Bank of San Francisco.
  6. C. Rangarajan, 1998. "Financial Development and Economic Growth," Journal of Social and Economic Development, Institute for Social and Economic Change, Bangalore, vol. 1(1), pages 10-23, January-J.
  7. Carlos Arteta & Barry Eichengreen & Charles Wyplosz, 2001. "When Does Capital Account Liberalization Help More than It Hurts?," NBER Working Papers 8414, National Bureau of Economic Research, Inc.
  8. Hali J. Edison & Francis E. Warnock, 2001. "A simple measure of the intensity of capital controls," International Finance Discussion Papers 708, Board of Governors of the Federal Reserve System (U.S.).
  9. Montiel, Peter & Reinhart, Carmen M., 1999. "Do capital controls and macroeconomic policies influence the volume and composition of capital flows? Evidence from the 1990s," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 619-635, August.
  10. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  11. Alan G. Ahearne & William L. Griever & Francis E. Warnock, 2000. "Information costs and home bias: an analysis of U.S. holdings of foreign equities," International Finance Discussion Papers 691, Board of Governors of the Federal Reserve System (U.S.).
  12. Beck, Thorsten & Levine, Ross & Loayza, Norman, 1999. "Finance and the sources of growth," Policy Research Working Paper Series 2057, The World Bank.
  13. Bekaert, G. & Harvey, C. R. & Lumsdaine, R. L., 2002. "The dynamics of emerging market equity flows," Journal of International Money and Finance, Elsevier, vol. 21(3), pages 295-350, June.
  14. Michael Leahy & Sebastian Schich & Gert Wehinger & Florian Pelgrin & Thorsteinn Thorgeirsson, 2001. "Contributions of Financial Systems to Growth in OECD Countries," OECD Economics Department Working Papers 280, OECD Publishing.
  15. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-58, June.
  16. Geert Bekaert & Campbell R. Harvey, 2000. "Capital Flows and the Behavior of Emerging Market Equity Returns," NBER Chapters, in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 159-194 National Bureau of Economic Research, Inc.
  17. Michael W. Klein & Giovanni Olivei, 1999. "Capital Account Liberalization, Financial Depth and Economic Growth," NBER Working Papers 7384, National Bureau of Economic Research, Inc.
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