Motivations for Capital Controls and Their Effectiveness

59 Pages Posted: 28 Aug 2015

See all articles by Radhika Pandey

Radhika Pandey

National Institute of Public Finance and Policy

Gurnain Kaur Pasricha

International Monetary Fund

Ila Patnaik

Indian Express; International Monetary Fund (IMF)

Ajay Shah

National Institute of Public Finance and Policy

Date Written: February 1, 2015

Abstract

We assess the motivations for changing capital controls and their effectiveness in India, a country with extensive and long-standing controls. We focus on the controls on foreign borrowing that can, in principle, be motivated by macroprudential concerns. We construct a fine-grained data set on capital control actions on foreign borrowing in India. Using event study methodology, we assess the factors that influence these capital control actions, the main factor being the exchange rate. Capital controls are tightened after appreciation, and eased after depreciation, of the exchange rate. Macroprudential concerns, measured by variables that capture systemic risk buildups, do not seem to be a factor shaping the use of capital controls. To assess the impact of controls, we use both event study and propensity score matching methodologies. Event study methodology suggests no impact of capital controls on most variables evaluated, but reveals limited evidence that capital controls relieve currency pressures in the short term. However, even this limited evidence disappears once selection bias is controlled for.

Keywords: capital controls, macroprudential policy, exchange rate management, propensity score matching

JEL Classification: F32, G15, G18

Suggested Citation

Pandey, Radhika and Pasricha, Gurnain Kaur and Patnaik, Ila and Shah, Ajay, Motivations for Capital Controls and Their Effectiveness (February 1, 2015). Available at SSRN: https://ssrn.com/abstract=2651140 or http://dx.doi.org/10.2139/ssrn.2651140

Radhika Pandey

National Institute of Public Finance and Policy ( email )

18/2, Satsang Vihar Marg
New Delhi, 110067
India

Gurnain Kaur Pasricha (Contact Author)

International Monetary Fund ( email )

United States

Ila Patnaik

Indian Express ( email )

New Delhi
India

International Monetary Fund (IMF) ( email )

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

Ajay Shah

National Institute of Public Finance and Policy

18/2, Satsang Vihar Marg
New Delhi, 110067
India

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