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Capital Controls and 21st Century Financial Crises: Evidence from Colombia and Thailand

  • Bruno Coelho
  • Kevin Gallagher

In the run up to the financial crisis of 2007-2009 many developing nations fell victim to massive inflows of capital, capital that their financial systems found difficult to absorb.� One of a number of policy options to respond to such inflows is unremunerated reserve requirements (URR).� Two countries, Colombia and Thailand, deployed URR in the second half of the decade.� This paper analyses the extent to which those URRs were successful in reducing the overall level and composition of capital inflows, reducing exchange rate appreciation and volatility, stemming asset bubbles, and granting more independence for monetary policy.� We find that URRs were modestly successful in Colombia and Thailand, though Thailand was less of a success than Colombia.� In Colombia the controls were able to reduce the overall volume of inflows and stem asset bubbles.� In Thailand, the URR did reduce the overall volume of flows, and the announcement of the URR caused a sharp drop in asset prices.� However, in both cases the controls were linked to exchange rate volatility and in Thailand asset prices recovered their upward trend the day after the announcement.� The results in this paper demonstrate that on the there is still a role for capital controls in the 21st century, but such controls should be more sophisticated than in years past.�

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Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp213.

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Date of creation: 2010
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Handle: RePEc:uma:periwp:wp213
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  1. Eliane A. Cardoso & Ilan Goldfajn, 1997. "Capital Flows to Brazil-The Endogeneity of Capital Controls," IMF Working Papers 97/115, International Monetary Fund.
  2. Jose De Gregorio & Sebastian Edwards & Rodrigo O. Valdes, 2000. "Controls on Capital Inflows: Do they Work?," NBER Working Papers 7645, National Bureau of Economic Research, Inc.
  3. Francisco A. Gallego & Leonardo Hernandez & Klaus Schmidt-Hebbel, 2000. "Capital Controls in Chile: Effective? Efficient?," Econometric Society World Congress 2000 Contributed Papers 0330, Econometric Society.
  4. Concha, Alvaro & Galindo, Arturo José & Vasquez, Diego, 2011. "An assessment of another decade of capital controls in Colombia: 1998–2008," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(4), pages 319-338.
  5. Reinhart, Carmen & Magud, Nicolas, 2007. "Capital controls: An evaluation," MPRA Paper 14097, University Library of Munich, Germany.
    • Nicolas Magud & Carmen M. Reinhart, 2007. "Capital Controls: An Evaluation," NBER Chapters, in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 645-674 National Bureau of Economic Research, Inc.
  6. Edwards, Sebastian & Rigobon, Roberto, 2009. "Capital controls on inflows, exchange rate volatility and external vulnerability," Journal of International Economics, Elsevier, vol. 78(2), pages 256-267, July.
  7. Ayhan Kose, M. & Prasad, Eswar S. & Taylor, Ashley D., 2011. "Thresholds in the process of international financial integration," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 147-179, February.
  8. Ilene Grabel, 2003. "Averting crisis? Assessing measures to manage financial integration in emerging economies," Cambridge Journal of Economics, Oxford University Press, vol. 27(3), pages 317-336, May.
  9. Villar Leonardo, 2010. "Latin America: Comments on Financial Regulation and International Capital Flows in Latin America," Journal of Globalization and Development, De Gruyter, vol. 1(1), pages 1-12, January.
  10. Binici, Mahir & Hutchison, Michael & Schindler, Martin, 2010. "Controlling capital? Legal restrictions and the asset composition of international financial flows," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 666-684, June.
  11. M. Ayhan Kose & Kenneth Rogoff & Eswar Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries; Some Empirical Evidence," IMF Occasional Papers 220, International Monetary Fund.
  12. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
  13. Edison, Hali & Reinhart, Carmen M., 2001. "Stopping hot money," Journal of Development Economics, Elsevier, vol. 66(2), pages 533-553, December.
  14. Benedict J. Clements & Herman Kamil, 2009. "Are Capital Controls Effective in the 21st Century? the Recent Experience of Colombia," IMF Working Papers 09/30, International Monetary Fund.
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