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Short and long-run integration : do capital controls matter ?

Author

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  • Kaminsky,Graciela
  • Schmukler,Sergio L.

Abstract

The authors study whether capital controls affect the link between domestic and foreign stock market prices and interest rates. To examine the characteristics of international market integration and the effects of capital controls in the short and long run, they apply band-pass filter techniques to data from six emerging economics during the 1990s. They find that markets seem to be linked more at longer horizons. Equity prices seem to be more connected internationally than interest rates. They also find little evidence that controls effectively segment domestic markets from foreign markets. And when they do, the effects seem to be short-lived. Moreover, the effects of controls on outflows do not seem to differ from those of controls on inflows. For example, controls on outflows in Venezuela during the 1994 crisis, and unremunerated reserve requirements in Chile and Colombia during a capital-inflow episode, seem to have shielded domestic markets at the most at very high frequencies. The degree of financial sophistication does not seem to affect the authors'conclusion on the insulation provided by capital controls. True, more developed financial markets, such as those in Brazil, are more closely linked to international markets than those in Colombia and Venezuela, which are far more illiquid. But capital controls do not seem to provide an extra cushion against international spillovers even in less developed markets.

Suggested Citation

  • Kaminsky,Graciela & Schmukler,Sergio L., 2001. "Short and long-run integration : do capital controls matter ?," Policy Research Working Paper Series 2660, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2660
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    References listed on IDEAS

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    1. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
    2. Bartolini, Leonardo & Drazen, Allan, 1997. "Capital-Account Liberalization as a Signal," American Economic Review, American Economic Association, vol. 87(1), pages 138-154, March.
    3. Philippe Bacchetta & Eric van Wincoop, 2000. "Capital Flows to Emerging Markets: Liberalization, Overshooting, and Volatility," NBER Chapters,in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 61-98 National Bureau of Economic Research, Inc.
    4. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    5. Edison, Hali & Reinhart, Carmen M., 2001. "Stopping hot money," Journal of Development Economics, Elsevier, vol. 66(2), pages 533-553, December.
    6. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
    7. Brecher, Richard A. & Diaz Alejandro, Carlos F., 1977. "Tariffs, foreign capital and immiserizing growth," Journal of International Economics, Elsevier, vol. 7(4), pages 317-322, November.
    8. 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.
    9. Akira Ariyoshi & Andrei A Kirilenko & Inci Ötker & Bernard J Laurens & Jorge I Canales Kriljenko & Karl F Habermeier, 2000. "Capital Controls; Country Experiences with Their Use and Liberalization," IMF Occasional Papers 190, International Monetary Fund.
    10. Alberto Alesina & Vittorio Grilli & Gian Maria Milesi-Ferrett, 1993. "The Political Economy of Capital Controls," NBER Working Papers 4353, National Bureau of Economic Research, Inc.
    11. Baxter, Marianne, 1994. "Real exchange rates and real interest differentials: Have we missed the business-cycle relationship?," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 5-37, February.
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    Citations

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    Cited by:

    1. Auguste, Sebastian & Dominguez, Kathryn M.E. & Kamil, Herman & Tesar, Linda L., 2006. "Cross-border trading as a mechanism for implicit capital flight: ADRs and the Argentine crisis," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1259-1295, October.
    2. Gebka, Bartosz & Serwa, Dobromil, 2007. "Intra- and inter-regional spillovers between emerging capital markets around the world," Research in International Business and Finance, Elsevier, vol. 21(2), pages 203-221, June.
    3. Saadaoui, Zied, 2007. "L’intégration financière internationale :Une comparaison descriptive des effets sur les pays industrialisés et les pays émergents
      [International financial integration: A descriptive comparison of t
      ," MPRA Paper 25330, University Library of Munich, Germany.
    4. Kalok Chan & Vicentiu Covrig & Lilian Ng, 2005. "What Determines the Domestic Bias and Foreign Bias? Evidence from Mutual Fund Equity Allocations Worldwide," Journal of Finance, American Finance Association, vol. 60(3), pages 1495-1534, June.
    5. repec:eee:revfin:v:35:y:2017:i:c:p:57-65 is not listed on IDEAS
    6. Pierre-Richard AgÈnor, 2003. "Benefits and Costs of International Financial Integration: Theory and Facts," The World Economy, Wiley Blackwell, vol. 26(8), pages 1089-1118, August.
    7. Francis, Bill B. & Hasan, Iftekhar & Hunter, Delroy M., 2002. "Emerging market liberalization and the impact on uncovered interest rate parity," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 931-956, November.
    8. Eva de Francisco, 2005. "Limited Participation, Income Distribution and Capital Account Liberalization," Computing in Economics and Finance 2005 454, Society for Computational Economics.

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