Capital Flow Deflection

48 Pages Posted: 4 Sep 2014

See all articles by Paolo E. Giordani

Paolo E. Giordani

LUISS "Guido Carli" University

Michele Ruta

Economic Research Division, WTO; Columbia Business School - Economics Department; International Monetary Fund (IMF)

Hans Weisfeld

International Monetary Fund (IMF)

Ling Zhu

University of Maryland

Date Written: August 2014

Abstract

This paper focuses on the coordination problem among borrowing countries imposing controls on capital inflows. In a simple model of capital flows and controls, we show that inflow restrictions distort international capital flows to other countries and that, in turn, such capital flow deflection may lead to a policy response. We then test the theory using data on inflow restrictions and gross capital inflows for a large sample of developing countries between 1995 and 2009. Our estimation yields strong evidence that capital controls deflect capital flows to other borrowing countries with similar economic characteristics. Notwithstanding these strong cross-border spillover effects, we do not find evidence of a policy response.

Keywords: Capital flows, Capital controls, Capital inflows, Spillovers, Econometric models, cross-border spillovers, policy response., capital flow, capital inflow, real gdp, growth rate, gdp growth, gdp growth rate, gdp per capita, capital control, capital outflows, management of capital flows, international capital flows, international capital, real effective exchange rate, capital market, capital account liberalization, cost of capital, capital account restrictions, exogenous shocks, volatile capital flows, volatility of capital flows, capital outflow, growth rates, volatile capital, domestic capital, determinants of capital flows, stock market, debt securities, bond yields, stringent capital contr

JEL Classification: F30, F40, F50

Suggested Citation

Giordani, Paolo E. and Ruta, Michele and Weisfeld, Hans and Zhu, Ling, Capital Flow Deflection (August 2014). IMF Working Paper No. 14/145. Available at SSRN: https://ssrn.com/abstract=2491596

Paolo E. Giordani (Contact Author)

LUISS "Guido Carli" University ( email )

Viale Romania 32
Roma, Roma 00197
Italy

Michele Ruta

Economic Research Division, WTO ( email )

Rue de Lausanne 154
CH-1211 Geneva
Switzerland

HOME PAGE: http://www.iue.it/Personal/Fellows/MicheleRuta/Welcome.htm

Columbia Business School - Economics Department ( email )

420 West 118th Street
New York, NY 10027
United States

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Hans Weisfeld

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ling Zhu

University of Maryland

College Park
College Park, MD 20742
United States

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