| 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. JEL Classification: F32,
F41, F42 |