Domestic and Multilateral Effects of Capital Controls in Emerging Markets

74 Pages Posted: 26 Aug 2015

See all articles by Gurnain Kaur Pasricha

Gurnain Kaur Pasricha

Government of Canada - Bank of Canada

Matteo Falagiarda

European Central Bank (ECB)

Martin Bijsterbosch

European Central Bank (ECB)

Joshua Aizenman

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

Multiple version iconThere are 2 versions of this paper

Date Written: August 25, 2015

Abstract

Using a novel dataset on changes in capital controls and currency-based prudential measures in 17 major emerging market economies (EMEs) over the period 2001-2011, this paper provides new evidence on domestic and multilateral (or spillover) effects of capital controls before and after the global financial crisis. Our results, based on panel VARs, suggest that capital control actions do not allow countries to avoid the trade-offs of the monetary policy trilemma. Where they have a desired impact on the trilemma variables – net capital inflows, monetary policy autonomy and the exchange rate – the size of that impact is generally small. While we find some evidence of effectiveness before the global financial crisis, the usefulness of these measures weakened in the post-crisis environment of abundant global liquidity and relatively strong economic growth in EMEs. Our results also show that capital control policies can have unintended consequences, as resident outflows offset the impact of capital control actions on gross inflows (or vice versa). These findings highlight the importance of the macroeconomic context and of the increasing role of resident flows in understanding the effectiveness of capital inflow management. Using panel near-VARs, we find significant spillovers of capital control actions in BRICS (Brazil, Russia, India, China and South Africa) to other EMEs during the 2000s. Spillover effects were more important in the aftermath of the global financial crisis than before the crisis, and arose from inflow tightening actions, rather than outflow easing measures. The channels through which these policies spilled over to other countries were exchange rates as well as capital flows (especially cross-border bank lending). Spillovers seem to be more prevalent in Latin America than in Asia, reflecting the greater role of cross-border banking and more open capital accounts in the former countries. These results are robust to various specifications of our models.

Keywords: Capital controls, capital flows, policy spillovers; emerging market economies; monetary policy trilemma

JEL Classification: F32, G16, F41, F42

Suggested Citation

Pasricha, Gurnain Kaur and Falagiarda, Matteo and Bijsterbosch, Martin and Aizenman, Joshua, Domestic and Multilateral Effects of Capital Controls in Emerging Markets (August 25, 2015). ECB Working Paper No. 1844. Available at SSRN: https://ssrn.com/abstract=2650458

Gurnain Kaur Pasricha

Government of Canada - Bank of Canada ( email )

Matteo Falagiarda

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Martin Bijsterbosch (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Joshua Aizenman

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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