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

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  • Bruno Coelho
  • Kevin Gallagher

Abstract

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.

Suggested Citation

  • Bruno Coelho & Kevin Gallagher, 2010. "Capital Controls and 21st Century Financial Crises: Evidence from Colombia and Thailand," Working Papers wp213, Political Economy Research Institute, University of Massachusetts at Amherst.
  • Handle: RePEc:uma:periwp:wp213
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    Cited by:

    1. Jongwanich, Juthathip & Kohpaiboon, Archanun, 2012. "Effectiveness of Capital Controls: Evidence from Thailand," Asian Development Review, Asian Development Bank, vol. 29(2), pages 50-93.
    2. Kevin Gallagher, 2011. "Regaining Control? Capital Controls and the Global Financial Crisis," Working Papers wp250, Political Economy Research Institute, University of Massachusetts at Amherst.
    3. Gerson Javier Pérez-Valbuena & Paula Barrios, 2022. "Subnational fiscal accounts under pressure: the effects of COVID-19 in a developing country," Documentos de trabajo sobre Economía Regional y Urbana 306, Banco de la Republica de Colombia.
    4. Daehwan Kim & Chi-Young Song, 2017. "Bankruptcy of Lehman Brothers: Determinants of Cross-country Impacts on Stock Market Volatility," International Journal of Economics and Financial Issues, Econjournals, vol. 7(3), pages 210-219.
    5. Matthew S. Yiu, 2011. "The Effect of Capital Flow Management Measures in Five Asian Economies on the Foreign Exchange Market," Working Papers 412011, Hong Kong Institute for Monetary Research.
    6. Chikako Baba & Annamaria Kokenyne, 2011. "Effectiveness of Capital Controls in Selected Emerging Markets in the 2000's," IMF Working Papers 2011/281, International Monetary Fund.
    7. Abhijit Sen Gupta & Pragya Atri, 2018. "Does Financial Sector Development Augment Cross-Border Capital Flows?," International Economic Journal, Taylor & Francis Journals, vol. 32(4), pages 499-523, October.
    8. Maldonado, Norma & Rozo, Carlos A., 2017. "Currency carry trade and the cost of international reserves in Mexico," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
    9. Jeffrey M. Chwieroth, 2015. "Managing and transforming policy stigmas in international finance: Emerging markets and controlling capital inflows after the crisis," Review of International Political Economy, Taylor & Francis Journals, vol. 22(1), pages 44-76, February.
    10. Juan Antonio Montecino & Jose Antonio Cordero, 2010. "Capital Controls and Monetary Policy in Developing Countries," CEPR Reports and Issue Briefs 2010-10, Center for Economic and Policy Research (CEPR).
    11. Taro Esaka & Shinji Takagi, 2013. "Testing the Effectiveness of Market-Based Controls: Evidence From the Experience of Japan With Short-Term Capital Flows in the 1970s," International Finance, Wiley Blackwell, vol. 16(1), pages 45-69, February.
    12. Jorg Bibow, 2011. "Permanent and Selective Capital Account Management Regimes as an Alternative to Self-Insurance Strategies in Emerging-market Economies," Economics Working Paper Archive wp_683, Levy Economics Institute.
    13. Karl F Habermeier & Annamaria Kokenyne & Chikako Baba, 2011. "The Effectiveness of Capital Controls and Prudential Policies in Managing Large Inflows," IMF Staff Discussion Notes 11/14, International Monetary Fund.
    14. Sen Gupta, Abhijit, 2010. "Management of International Capital Flows: The Indian Experience," MPRA Paper 23747, University Library of Munich, Germany.
    15. Mukherjee, Sanchita, 2011. "Does the level of capital openness explain “fear of floating” amongst the inflation targeting countries?," MPRA Paper 30289, University Library of Munich, Germany.
    16. Jacques Sapir, 2017. "The relationship between monetary policy and economic development in modern Europe: Problems and possible solutions," Studies on Russian Economic Development, Springer, vol. 28(5), pages 467-471, September.
    17. Ahmed, Shaghil & Zlate, Andrei, 2014. "Capital flows to emerging market economies: A brave new world?," Journal of International Money and Finance, Elsevier, vol. 48(PB), pages 221-248.
    18. United Nations ESCAP, 2012. "Dealing with protectionist pressures," STUDIES IN TRADE AND INVESTMENT, in: Asia-Pacific Trade and Investment Report 2012: Recent Trends and Developments, chapter 5, pages 79-101, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).

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