Posted

February 05, 2015 03:55:31 AM

Date

2015-01

Author

Gurnain Pasricha, Matteo Falagiarda, Martin Bijsterbosch, and Joshua Aizenman

Affiliation

National Bureau of Economic Research

Title

Domestic and Multilateral Effects of Capital Controls in Emerging Markets

Summary /
Abstract

This paper assesses the effects of capital controls in emerging market economies (EMEs) during 2001-2011, focusing on cross-country spillovers of changes in these controls. We use a novel dataset on weighted changes in capital controls (and currency-based measures) in 18 major EMEs. We first use panel VARs to test for effectiveness of own capital controls which take into account the endogeneity of such controls. Next, using near-VARs, we provide new evidence of multilateral effects of capital controls of the BRICS. Our results suggest a limited domestic impact of capital controls. Outflow easing measures do not have a significant impact on any of the variables in the model. Inflow tightening measures increase monetary policy autonomy (measured by the covered interest differential), but at the cost of a more appreciated exchange rate. These measures are therefore not effective in allowing EMEs to choose a trilemma configuration with a de-facto closed capital account, larger monetary policy autonomy and a weaker exchange rate. We do not find a clear difference between countries with extensive and long-standing capital controls (India and China) and other countries. Capital control actions in BRICS (Brazil, Russia, India, China and South Africa) had significant spillovers to other EMEs during the 2000s in particular via exchange rates. Multilateral effects were more important among the BRICS than between the BRICS and other, smaller EMEs, particularly in the pre-global financial crisis period. They were more significant in the aftermath of the global financial crisis than before the crisis. This change stems in particular from the fact that spillovers from capital flow policies in BRICS countries to non-BRICS became more significant in the post-global financial crisis period. These results are robust to various specifications of our models.

Keywords

Capital controls, emerging markets

URL

http://www.nber.org/papers/w20822.pdf

Remarks

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