Working Paper: NBER ID: w18879
Authors: Joshua Aizenman; Gurnain Kaur Pasricha
Abstract: In this paper, we provide empirical evidence on the factors that motivated emerging economies to change their capital outflow controls in the recent decades. Liberalization of capital outflow controls can allow emerging market economies (EMEs) to reduce net capital inflow (NKI) pressures, but may cost their governments the fiscal revenues that external financial repression generates. Our results indicate that external repression revenues in EMEs declined substantially in the 2000's compared with the 1980's. In line with this decline in external repression revenues and their growth accelerations in 2000's, concerns related to net capital inflows took predominance over fiscal concerns in the decisions to liberalize capital outflow controls. Emerging markets facing high volatility in net capital inflows and higher balance sheet exposures liberalized outflows less. Countries eased outflows more in response to higher net capital inflows, higher appreciation pressures in the exchange market, higher real exchange rate volatility and greater accumulation of reserves.
Keywords: capital controls; emerging markets; net capital inflows; fiscal concerns; financial repression
JEL Codes: F3; F31; F32; F36; F6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decline in external repression revenues (H29) | Shift in policy (concerns related to net capital inflows) (F32) |
| Higher volatility in net capital inflows (F32) | Reduced liberalization of outflows (F32) |
| Higher appreciation pressures and reserve accumulation (E49) | Liberalization of outflows (F32) |
| Higher net capital inflow pressures (F32) | More liberalization of outflows (F32) |
| Significant liberalization of outflow controls despite negative external repression revenues (F69) | Prioritization of net capital inflow concerns over fiscal concerns (F32) |