Working Paper: CEPR ID: DP793
Authors: Alberto Alesina; Vittorio Grilli; Gian Maria Milesi-Ferretti
Abstract: This paper studies the institutional and political determinants of capital controls in a sample of 20 OECD countries for the period 195089. One of the most interesting results is that capital controls are more likely to be imposed by strong governments, which have a relatively `free' hand over monetary policy, because the Central Bank is not very independent. By imposing capital controls these governments raise more seigniorage revenue and keep interest rates artificially low. As a result, public debt accumulates at a slower rate than otherwise. This suggests that an institutional reform which makes the Central Bank more independent makes it more difficult for the government to finance its budget. The tightening of the fiscal constraint may force the government to adjust towards a more `sound' fiscal policy. We also find that, as expected, and in accordance with the theory, capital controls are more likely to be introduced when the exchange rate is pegged or managed. We found no effects of capital controls on growth, however, and reject rather strongly the hypothesis that capital controls reduce growth.
Keywords: capital controls; political economy; seigniorage
JEL Codes: E22; E50; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital controls (F38) | seigniorage revenue (H27) |
| capital controls (F38) | inflation rates (E31) |
| strong governments (H10) | capital controls (F38) |
| central bank independence (E58) | capital controls (F38) |
| capital controls (F38) | public debt accumulation (H63) |
| capital controls (F38) | economic growth (O49) |
| capital controls (F38) | exchange rate stabilization (F31) |
| managed exchange rates (F31) | capital controls (F38) |