Capital controls as shock absorbers

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Abstract

The recent global financial crisis has resuscitated the debate on the relevance of capital controls as effective policy instruments. This paper contributes to this debate by studying the shock-absorbing capacity of capital controls. Using a recently developed capital control dataset for a panel of 33 emerging market economies, I show that output in economies with stricter capital inflow controls responds significantly less to global credit supply shocks, whereas capital outflow controls have no significant shock-absorbing capacity. Leverage is significantly lower in economies enacting stricter capital inflow controls, suggesting that financial frictions play a role in driving the shock-absorbing capacity of inflow controls.

Original languageEnglish
Pages (from-to)43-67
Number of pages25
JournalJournal of International Economics
Volume109
DOIs
StatePublished - 1 Nov 2017

Keywords

  • Capital controls
  • Credit supply shocks
  • Emerging market economies

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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