Working Paper: NBER ID: w8142
Authors: Ethan Kaplan; Dani Rodrik
Abstract: Malaysia recovered from the Asian financial crisis swiftly after the imposition of capital controls in September 1998. The fact that Korea and Thailand recovered in parallel has been interpreted as suggesting that capital controls did not play a significant role in facilitating Malaysia's rebound. However, the financial crisis was deepening in Malaysia in the summer of 1998, while it had significantly eased up in Korea and Thailand. We employ a time-shifted differences-in- differences technique to exploit the differences in the timing of the crises. Compared to IMF programs, we find that the Malaysian policies produced faster economic recovery, smaller declines in employment and real wages, and more rapid turnaround in the stock market.
Keywords: capital controls; financial crisis; Malaysia; IMF; economic recovery
JEL Codes: F33; F36; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Malaysian capital controls (F38) | segmentation of Malaysian financial markets from international capital flows (F32) |
| segmentation of Malaysian financial markets from international capital flows (F32) | stabilization of the exchange rate (F31) |
| segmentation of Malaysian financial markets from international capital flows (F32) | reduction in speculative activities against the ringgit (G18) |
| combination of capital controls, fiscal reflation, and fixed exchange rate (E63) | faster economic recovery compared to IMF approach (E65) |
| timing of the controls coinciding with peak speculative pressures (E32) | direct relationship between implementation of controls and subsequent economic stabilization (E61) |
| immediate effects of capital controls (F38) | positive outcomes (I14) |
| long-term consequences of capital controls (F38) | potential deterrent effects on future foreign direct investment (F23) |