Working Paper: NBER ID: w10284
Authors: Kristin J. Forbes
Abstract: Widespread support for capital account liberalization in emerging markets has recently shifted to skepticism and even support for capital controls in certain circumstances. This sea-change in attitudes has been bolstered by the inconclusive macroeconomic evidence on the benefits of capital account liberalization. There are several compelling reasons why it is difficult to measure the aggregate impact of capital controls in very different countries. Instead, a new and more promising approach is more detailed microeconomic studies of how capital controls have generated specific distortions in individual countries. Several recent papers have used this approach and examined very different aspects of capital controls from their impact on crony capitalism in Malaysia and on financing constraints in Chile, to their impact on US multinational behavior and the efficiency of stock market pricing. Each of these diverse studies finds a consistent result: capital controls have significant economic costs and lead to a misallocation of resources. This new microeconomic evidence suggests that capital controls are not just sand', but rather mud in the wheels' of market discipline.
Keywords: No keywords provided
JEL Codes: F3; F15; F21; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital controls in Malaysia (F32) | reduced market discipline (G38) |
| capital controls in Malaysia (F32) | shelter for cronyism (D73) |
| politically connected firms (G38) | increase in market value after capital controls (F32) |
| capital controls in Malaysia (F32) | misallocation of resources (D61) |
| encaje tax in Chile (H29) | increased financial constraints for smaller firms (G32) |
| increased financial constraints for smaller firms (G32) | reduced investment growth (E20) |
| capital controls (F38) | distort investment decisions by U.S. multinationals (F23) |
| capital controls (F38) | reduction in efficiency of stock market pricing (G14) |