Working Paper: NBER ID: w19671
Authors: Andrés Fernández; Alessandro Rebucci; Martín Uribe
Abstract: A growing recent theoretical literature advocates the use of prudential capital control policy, that is, the tightening of restrictions on cross-border capital flows during booms and the relaxation thereof during recessions. We examine the behavior of capital controls in a large number of countries over the period 1995-2011. We find that capital controls are remarkably acyclical. Boom-bust episodes in output, the current account, or the real exchange rate are associated with virtually no movements in capital controls. These results are robust to decomposing boom-bust episodes along a number of dimensions, including the level of development, the level of external indebtedness, or the exchange-rate regime. We also document a near complete acyclicality of capital controls during the Great Contraction of 2007-2009.
Keywords: capital controls; prudential policy; macroeconomic stability
JEL Codes: E6; F3; F4; F5; G0; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| capital controls do not exhibit a systematic countercyclical behavior (F32) | capital controls on inflows or outflows remain virtually unchanged (F32) |
| capital controls on inflows and outflows are positively correlated (F32) | capital controls are not used as a stabilization tool (F38) |
| capital controls show negligible responsiveness during economic expansion or contraction (F32) | no systematic application of these controls to mitigate economic fluctuations (E64) |