Short- and Long-Run Integration: Do Capital Controls Matter?

46 Pages Posted: 10 Jul 2001

See all articles by Graciela Kaminsky

Graciela Kaminsky

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

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Multiple version iconThere are 3 versions of this paper

Date Written: August 2001


Do controls on capital flows persistently isolate domestic markets from international markets? Or is the insulation they provide just ephemeral?

Kaminsky and Schmukler study whether capital controls affect the link between domestic and foreign stock market prices and interest rates. To examine the characteristics of international market integration and the effects of capital controls in the short and long run, they apply band-pass filter techniques to data from six emerging economies during the 1990s.

They find that markets seem to be linked more at longer horizons. Equity prices seem to be more connected internationally than interest rates.

They also find little evidence that controls effectively segment domestic markets from foreign markets. And when they do, the effects seem to be short-lived.

Moreover, the effects of controls on outflows do not seem to differ from those of controls on inflows. For example, controls on outflows in Venezuela during the 1994 crisis, and unremunerated reserve requirements in Chile and Colombia during a capital-inflow episode, seem to have shielded domestic markets at the most at very high frequencies.

The degree of financial sophistication does not seem to affect Kaminsky and Schmukler's conclusions on the insulation provided by capital controls. True, more developed financial markets, such as those in Brazil, are more closely linked to international markets than those in Colombia and Venezuela, which are far more illiquid. But capital controls do not seem to provide an extra cushion against international spillovers even in less developed markets.

This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to understand the functioning of financial markets and the benefits of financial integration. The study was funded by the Bank's Research Support Budget under the research project "Financial Development and Contagion." The authors may be contacted at or

JEL Classification: F02, F21, F32, F36, G15

Suggested Citation

Kaminsky, Graciela and Schmukler, Sergio, Short- and Long-Run Integration: Do Capital Controls Matter? (August 2001). World Bank Policy Research Working Paper No. 2660. Available at SSRN:

Graciela Kaminsky

National Bureau of Economic Research (NBER)

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George Washington University - Department of Economics ( email )

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Sergio Schmukler (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

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MSN MC 3-301
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)


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