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Why do emerging markets liberalize capital outflow controls? Fiscal versus net capital flow concerns

  • Joshua Aizenman
  • Gurnain Kaur Pasricha

In this paper, we provide empirical evidence on the factors that motivated emerging economies to change their capital outflow controls in the 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 2000's compared with the 1980's. In line with this decline in external repression revenues and their growth accelerations in 2000's, concerns related to net capital inflows took predominance over fiscal concerns in the decisions to liberalize capital outflow controls. Emerging markets facing high volatility in net capital inflows and higher balance sheet exposures liberalized outflows less. Countries eased outflows more in response to higher net capital inflows, higher appreciation pressures in the exchange market, higher real exchange rate volatility and greater accumulation of reserves.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18879.

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Date of creation: Mar 2013
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Publication status: published as Aizenman, Joshua & Pasricha, Gurnain Kaur, 2013. "Why do emerging markets liberalize capital outflow controls? Fiscal versus net capital flow concerns," Journal of International Money and Finance, Elsevier, vol. 39(C), pages 28-64.
Handle: RePEc:nbr:nberwo:18879
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  1. Bird,Richard & Gendron,Pierre-Pascal, 2011. "The VAT in Developing and Transitional Countries," Cambridge Books, Cambridge University Press, number 9781107401440, Junio.
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