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Capital Controls: Myth and Reality - A Portfolio Balance Approach


Carmen M. Reinhart


Peter G. Peterson Institute for International Economics; National Bureau of Economic Research (NBER)

Nicolas E. Magud


International Monetary Fund (IMF)

Kenneth Rogoff


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

February 1, 2011

Peterson Institute for International Economics Working Paper No. 2011-07

Abstract:     
The literature on capital controls has (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a “success” and (iv) the empirical studies lack a common methodology - furthermore these are significantly “overweighted” by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as capital controls. Also, given that success is measured so differently across studies, we sought to “standardize” the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of capital controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies in that the WCCE controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia. Then, using a portfolio balance approach we model the effects of imposing capital controls on short-term flows. We find that there should exist country-specific characteristics for capital controls to be effective. From this simple perspective, this rationalizes why some capital controls were effective and some were not. We also show that the equivalence in effects of price- vs. quantity-capital control are conditional on the level of short-term capital flows.

Number of Pages in PDF File: 47

Keywords: Capital Controls

JEL Classification: E44, E5, F3, F30, F32, F34, F41

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Date posted: March 2, 2011  

Suggested Citation

Reinhart, Carmen M. and Magud, Nicolas E. and Rogoff, Kenneth, Capital Controls: Myth and Reality - A Portfolio Balance Approach (February 1, 2011). Peterson Institute for International Economics Working Paper No. 2011-07. Available at SSRN: http://ssrn.com/abstract=1773692 or http://dx.doi.org/10.2139/ssrn.1773692

Contact Information

Carmen M. Reinhart (Contact Author)
Peter G. Peterson Institute for International Economics ( email )
1750 Massachusetts Avenue, NW
Washington, DC 20036
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Nicolas E. Magud
International Monetary Fund (IMF) ( email )
700 19th Street, N.W.
Washington, DC 20431
United States
Kenneth S. Rogoff
Harvard University - Department of Economics ( email )
Littauer Center
Room 232
Cambridge, MA 02138
United States
617-495-4022 (Phone)
617-495-7730 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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