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Sticky Capital Controls

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  • Miguel Acosta-Henao
  • Laura Alfaro
  • Andrés Fernández

Abstract

We build a new dataset using textual analysis, from which we document a set of stylized facts regarding the use of capital controls, along their intensive and extensive margins for 21 emerging markets, with a focus on priced-based controls. We document that capital controls are “sticky”; that is, changes do not occur frequently, and when they do, they remain in place for a long time. Overall, price-based capital controls have not been used systematically across countries or time, and there has been considerable heterogeneity across countries in terms of the intensity with which they have been used. We then present a model of capital controls relying on pecuniary externalities augmented by including an (S; s) cost of implementing such policies and illustrate how this friction goes a long way toward bringing the model closer to the data. When the extended model is calibrated for each of the countries in the new dataset, we find that the size of these costs is large, thus substantially reducing the welfare-enhancing effects of capital controls compared with the frictionless Ramsey benchmark. We conclude with a discussion of the structural interpretations of such costs, which calls for a richer set of policy constraints when considering the use of capital controls in models of pecuniary externalities.

Suggested Citation

  • Miguel Acosta-Henao & Laura Alfaro & Andrés Fernández, 2020. "Sticky Capital Controls," NBER Working Papers 26997, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26997
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    Cited by:

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    2. repec:sea:wpaper:wp46 is not listed on IDEAS
    3. Gelos, Gaston & Gornicka, Lucyna & Koepke, Robin & Sahay, Ratna & Sgherri, Silvia, 2022. "Capital flows at risk: Taming the ebbs and flows," Journal of International Economics, Elsevier, vol. 134(C).
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    5. Bank for International Settlements, 2021. "Changing patterns of capital flows," CGFS Papers, Bank for International Settlements, number 66.
    6. Wang, Jian & Wu, Jason, 2021. "Is capital flow management effective? Evidence based on U.S. monetary policy shocks," Journal of International Money and Finance, Elsevier, vol. 118(C).
    7. Rogelio De la Peña, 2021. "Should monetary policy lean against the wind in a small-open economy? Revisiting the Tinbergen rule," Working Papers 2021-01, Banco de México.
    8. Yang Zhou, 2022. "The Effects of Capital Controls on Housing Prices," Discussion Paper Series DP2022-29, Research Institute for Economics & Business Administration, Kobe University.
    9. Carlos Madeira, 2022. "The evolution of macroprudential policy use in Chile, Latin America and the OECD," Working Papers Central Bank of Chile 958, Central Bank of Chile.

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G01 - Financial Economics - - General - - - Financial Crises

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