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Kenneth Rogoff - One of the best experts on this subject based on the ideXlab platform.
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Capital Controls myth and reality a portfolio balance approach
Annals of Economics and Finance, 2011Co-Authors: Nicolas E Magud, Carmen Reinhart, Kenneth RogoffAbstract:This paper is a meta-analysis of the literature on Capital Controls that aims to solve (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of Controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a "success"; and (iv) the empirical studies lack a common methodology-furthermore these are significantly over-weighted by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by being very explicit about what measures are construed as Capital Controls. Also, given that success is measured so differently across studies, we sought to standardize the results of the close to 40 empirical studies we summarize in this paper. The standardization was done by constructing two indices of Capital Controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Controls Effectiveness Index (WCCE Index). The difference between them lies in that the WCCE Controls for the differentiated degree of methodological rigor applied in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well-known episodes than those of Chile and Malaysia, and the more recent Controls on outflows in emerging Europe. We find that only under countryspecific characteristics are Capital Controls effective, implying that, more often than not, in practice they do not work. We also show that the equivalence in effects of price vs. quantity Capital Controls is conditional on the level of short-term Capital flows.
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Capital Controls myth and reality a portfolio balance approach
National Bureau of Economic Research, 2011Co-Authors: Nicolas E Magud, Carmen Reinhart, Kenneth RogoffAbstract:The literature on Capital Controls has (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of Controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a "success" and (iv) the empirical studies lack a common methodology-furthermore these are significantly "overweighted" by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as Capital Controls. Also, given that success is measured so differently across studies, we sought to "standardize" the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of Capital Controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies in that the WCCE Controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia. Then, using a portfolio balance approach we model the effects of imposing Capital Controls on short-term flows. We find that there should exist country-specific characteristics for Capital Controls to be effective. From this simple perspective, this rationalizes why some Capital Controls were effective and some were not. We also show that the equivalence in effects of price- vs. quantity-Capital control are conditional on the level of short-term Capital flows.
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Capital Controls myth and reality a portfolio balance approach to Capital Controls
Federal Reserve Bank of San Francisco Working Paper Series, 2007Co-Authors: Nicolas E Magud, Carmen Reinhart, Kenneth RogoffAbstract:The literature on Capital Controls has (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of Controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a “success” and (iv) the empirical studies lack a common methodology-furthermore these are significantly “overweighted” by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as Capital Controls. Also, given that success is measured so differently across studies, we sought to “standardize” the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of Capital Controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies only in that the WCCE Controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia. Then, using a portfolio balance approach we model the effects of imposing short-term Capital Controls. We find that there should exist country-specific characteristics for Capital Controls to be effective. From these simple perspective, this rationalizes why some Capital Controls were effective and some were not. We also show that the equivalence in effects of price- vs. quantity-Capital control are conditional on the level of short–term Capital flows.
Shigeto Kitano - One of the best experts on this subject based on the ideXlab platform.
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Capital Controls and Financial Frictions in a Small Open Economy
Open Economies Review, 2017Co-Authors: Shigeto Kitano, Kenya TakakuAbstract:We develop a small open economy model with financial frictions between domestic banks and foreign investors, and examine the welfare-improving effect of Capital Controls. We show that Capital Controls are effective in addressing the amplification effect due to financial frictions. As the degree of financial frictions increases, the welfare-improving effect of Capital Controls becomes larger and a more aggressive policy rule is appropriate. Comparing two economies, one with and one without “liability dollarization,” we also find that the welfare-improving effect of Capital Controls is larger in the presence of “liability dollarization,” and the difference between the effects becomes larger as the degree of financial frictions increases.
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Capital Controls and Welfare
Journal of Macroeconomics, 2011Co-Authors: Shigeto KitanoAbstract:This paper computes welfare levels under different degree of Capital Controls and compares them with the welfare level under perfect Capital mobility by using the methodology of Schmitt-Grohe and Uribe (2007). We show that perfect Capital mobility is not always optimal and that Capital Controls may enhance an economy’s welfare level. There exists an optimal degree of Capital-account restriction that achieves a higher level of welfare than that under perfect Capital mobility, if the economy has costly financial intermediaries. The results of our analysis imply that as the domestic financial intermediaries are less efficient, the government should impose stricter Capital Controls in the form of a tax on foreign borrowing.
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Capital Controls, Public Debt and Currency Crises
Journal of Economics, 2007Co-Authors: Shigeto KitanoAbstract:This paper examines the possibility that, contrary to conventional wisdom, Capital Controls accelerate currency crises. Theoretical analysis shows that Capital Controls can constitute an additional burden on government budget and so bring forward the onset of crises. Since perfect Capital mobility does not occur, domestic interest rates may deviate from world interest rates. High interest rates under Capital Controls create an additional cost of servicing outstanding domestic public debt, precipitating crises. Even though the government can delay crises with Capital Controls, welfare may be less than in a situation with perfect Capital mobility.
Carmen Reinhart - One of the best experts on this subject based on the ideXlab platform.
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Capital Controls myth and reality a portfolio balance approach
Annals of Economics and Finance, 2011Co-Authors: Nicolas E Magud, Carmen Reinhart, Kenneth RogoffAbstract:This paper is a meta-analysis of the literature on Capital Controls that aims to solve (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of Controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a "success"; and (iv) the empirical studies lack a common methodology-furthermore these are significantly over-weighted by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by being very explicit about what measures are construed as Capital Controls. Also, given that success is measured so differently across studies, we sought to standardize the results of the close to 40 empirical studies we summarize in this paper. The standardization was done by constructing two indices of Capital Controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Controls Effectiveness Index (WCCE Index). The difference between them lies in that the WCCE Controls for the differentiated degree of methodological rigor applied in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well-known episodes than those of Chile and Malaysia, and the more recent Controls on outflows in emerging Europe. We find that only under countryspecific characteristics are Capital Controls effective, implying that, more often than not, in practice they do not work. We also show that the equivalence in effects of price vs. quantity Capital Controls is conditional on the level of short-term Capital flows.
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Capital Controls myth and reality a portfolio balance approach
National Bureau of Economic Research, 2011Co-Authors: Nicolas E Magud, Carmen Reinhart, Kenneth RogoffAbstract:The literature on Capital Controls has (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of Controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a "success" and (iv) the empirical studies lack a common methodology-furthermore these are significantly "overweighted" by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as Capital Controls. Also, given that success is measured so differently across studies, we sought to "standardize" the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of Capital Controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies in that the WCCE Controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia. Then, using a portfolio balance approach we model the effects of imposing Capital Controls on short-term flows. We find that there should exist country-specific characteristics for Capital Controls to be effective. From this simple perspective, this rationalizes why some Capital Controls were effective and some were not. We also show that the equivalence in effects of price- vs. quantity-Capital control are conditional on the level of short-term Capital flows.
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Capital Controls myth and reality a portfolio balance approach to Capital Controls
Federal Reserve Bank of San Francisco Working Paper Series, 2007Co-Authors: Nicolas E Magud, Carmen Reinhart, Kenneth RogoffAbstract:The literature on Capital Controls has (at least) four very serious apples-to-oranges problems: (i) There is no unified theoretical framework to analyze the macroeconomic consequences of Controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a “success” and (iv) the empirical studies lack a common methodology-furthermore these are significantly “overweighted” by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as Capital Controls. Also, given that success is measured so differently across studies, we sought to “standardize” the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of Capital Controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies only in that the WCCE Controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia. Then, using a portfolio balance approach we model the effects of imposing short-term Capital Controls. We find that there should exist country-specific characteristics for Capital Controls to be effective. From these simple perspective, this rationalizes why some Capital Controls were effective and some were not. We also show that the equivalence in effects of price- vs. quantity-Capital control are conditional on the level of short–term Capital flows.
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Capital Controls an evaluation
National Bureau of Economic Research, 2006Co-Authors: Nicolas E Magud, Carmen ReinhartAbstract:The literature on Capital Controls has (at least) four very serious apples-to-oranges problems: (i) There is not unified theoretical framework to analyze the macroeconomic consequences of Controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a "success" and (iv) the empirical studies lack a common methodology -- furthermore these are significantly "overweighted" by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as Capital Controls. Also, given that success is measured so differently across studies, we sought to "standardize" the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of Capital Controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies only in that the WCCE Controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia.
Anton Korinek - One of the best experts on this subject based on the ideXlab platform.
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Capital Controls: Theory and Evidence
National Bureau of Economic Research, 2019Co-Authors: Bilge Erten, Anton Korinek, José Antonio OcampoAbstract:This paper synthesizes recent advances in the theoretical and empirical literature on Capital Controls. We start by observing that international Capital flows have both benefits and costs, but some of these are not internalized by individual actors and thus constitute externalities. The theoretical literature has identified pecuniary externalities and aggregate demand externalities that respectively contribute to financial instability and recessions. These externalities provide a natural rationale for counter-cyclical Capital Controls that lean against boom and busts cycles in international Capital flows. The empirical literature has developed several measures of Capital Controls to capture different aspects of Capital account openness. We evaluate the strengths and weaknesses of different measures and provide an overview of the empirical findings on the effectiveness of Capital Controls in addressing the externalities identified by the theory literature, i.e. in reducing financial fragility and enhancing macroeconomic stability. We also discuss strategies to deal with the endogeneity of Capital Controls in such statistical exercises. We conclude by providing an overview of the historical and current debates on the role of Capital Controls in macroeconomic management and their relationship to the academic literature.
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Capital Controls or macroprudential regulation
Journal of International Economics, 2016Co-Authors: Anton Korinek, Damiano SandriAbstract:International Capital flows can create significant financial instability in emerging economies. Does this make it optimal to impose Capital Controls or should policymakers rely on domestic macroprudential regulation in their quest for greater financial stability? This paper shows that it is desirable to employ both instruments to mitigate contractionary exchange rate depreciations: Macroprudential regulation reduces the amount and riskiness of financial liabilities, no matter whether they are financed by domestic or foreign lenders; Capital Controls increase the aggregate net worth of the economy by reducing net inflows. Both types of policy measures make the economy more stable and reduce the incidence and severity of crises. They should be set higher the greater an economy's debt burden and the higher domestic inequality. In a calibration based on the East Asian crisis countries, we find that it is optimal to impose both Capital Controls and macroprudential regulation that amount to a 2% tax on debt flows or equivalent quantity regulations. In advanced countries where the risk of contractionary exchange rate depreciations is more limited, the role for Capital Controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices.
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Capital Controls or macroprudential regulation
IMF Working Papers, 2015Co-Authors: Anton Korinek, Damiano SandriAbstract:International Capital flows can create significant financial instability in emerging economies because of pecuniary externalities associated with exchange rate movements. Does this make it optimal to impose Capital Controls or should policymakers rely on domestic macroprudential regulation? This paper presents a tractable model to show that it is desirable to employ both types of instruments: Macroprudential regulation reduces overborrowing, while Capital Controls increase the aggregate net worth of the economy as a whole by also stimulating savings. The two policy measures should be set higher the greater an economy's debt burden and the higher domestic inequality. In our baseline calibration based on the East Asian crisis countries, we find optimal Capital Controls and macroprudential regulation in the magnitude of 2 percent. In advanced countries where the risk of sharp exchange rate depreciations is more limited, the role for Capital Controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices.
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Capital Controls or macroprudential regulation
National Bureau of Economic Research, 2014Co-Authors: Anton Korinek, Damiano SandriAbstract:We examine the effectiveness of Capital Controls versus macroprudential regulation in reducing financial fragility in a small open economy model in which there is excessive borrowing because of externalities associated with financial crises and contractionary exchange rate depreciations. We find that both types of instruments play distinct roles: macroprudential regulation reduces the indebtedness of leveraged borrowers whereas Capital Controls induce more precautionary behavior for the economy as a whole, including for savers. This reduces crisis risk by shoring up aggregate net worth and mitigating the transfer problem that occurs during crises. In advanced countries where the risk of large contractionary depreciations is more limited, the role for Capital Controls subsides. However, macroprudential regulation remains essential in our model to mitigate booms and busts in asset prices.
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Capital Controls and currency wars
2012Co-Authors: Anton KorinekAbstract:Policy measures that aect international Capital ‡ows have led to consider- able controversy in international policy circles. This paper analyzes the welfare eects of such measures in a general equilibrium model of the world economy. Capital Controls or reserve accumulation in one country leads to signi…cant in- ternational spillover eects via lower world interest rates and greater ‡ows to other countries. If Controls are designed to oset domestic externalities, the resulting equilibrium is nonetheless Pareto e¢ cient, i.e. a global planner would impose the same measure and there is no role for global coordination. We il- lustrate this for several examples of externalities, including …nancial stability externalities, and Capital Controls that act as second-best devices to correct a domestic distortion. On the other hand, if policymakers face an imperfect set of instruments, e.g. targeting problems or costly enforcement, then multilateral coordination is desirable in order to mitigate the ine¢ ciencies arising from such imperfections.
Kristin J Forbes - One of the best experts on this subject based on the ideXlab platform.
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bubble thy neighbor portfolio effects and externalities from Capital Controls
Journal of International Economics, 2016Co-Authors: Marcel Fratzscher, Kristin J Forbes, Thomas Kostka, Roland StraubAbstract:We use changes in Brazil's tax on Capital inflows from 2006 to 2013 to test for direct portfolio effects and externalities from Capital Controls on investor portfolios. We find that an increase in Brazil's tax on foreign investment in bonds causes fund managers to significantly decrease their portfolio allocations to Brazil in both bonds and equities. Fund managers simultaneously increase allocations to other countries that have substantial exposure to China and decrease allocations to countries viewed as more likely to adjust their Capital Controls. Much of the effect of Capital Controls on portfolio allocation appears to occur through signalling — i.e., changes in investor expectations about future policies — rather than the direct cost of the Controls. This evidence of significant externalities from Capital Controls suggests that any assessment of Controls should consider their effects on portfolio flows to other countries.
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bubble thy neighbor portfolio effects and externalities from Capital Controls
National Bureau of Economic Research, 2012Co-Authors: Marcel Fratzscher, Kristin J Forbes, Thomas Kostka, Roland StraubAbstract:We use changes in Brazil's tax on Capital inflows from 2006 to 2011 to test for direct portfolio effects and externalities from Capital Controls on investor portfolios. The analysis is structured based on information from investor interviews. We find that an increase in Brazil's tax on foreign investment in bonds causes investors to significantly decrease their portfolio allocations to Brazil in both bonds and equities. Investors simultaneously increase allocations to other countries that have substantial exposure to China and decrease allocations to countries viewed as more likely to use Capital Controls. Much of the effect of Capital Controls on portfolio flows appears to occur through signalling --i.e. changes in investor expectations about future policies-- rather than the direct cost of the Controls. This evidence of significant externalities from Capital Controls suggests that any assessment of Controls should consider their effects on portfolio flows to other countries.
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the microeconomic evidence on Capital Controls no free lunch
National Bureau of Economic Research, 2005Co-Authors: Kristin J ForbesAbstract:Macroeconomic analyses of Capital Controls face a number of imposing challenges and have yielded mixed results to date. This paper takes a different approach and surveys an emerging literature that evaluates various microeconomic effects of Capital Controls and Capital account liberalization. Several key themes emerge. First, Capital Controls tend to reduce the supply of Capital, raise the cost of financing, and increase financial constraints - especially for smaller firms, firms without access to international Capital markets and firms without access to preferential lending. Second, Capital Controls can reduce market discipline in financial markets and the government, leading to a more inefficient allocation of Capital and resources. Third, Capital Controls significantly distort decision-making by firms and individuals, as they attempt to minimize the costs of the Controls or even evade them outright. Fourth, the effects of Capital Controls can vary across different types of firms and countries, reflecting different pre-existing economic distortions. Finally, Capital Controls can be difficult and costly to enforce, even in countries with sound institutions and low levels of corruption. This microeconomic evidence on Capital Controls suggests that they have pervasive effects and often generate unexpected costs. Capital Controls are no free lunch.
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Capital Controls mud in the wheels of market discipline
National Bureau of Economic Research, 2004Co-Authors: Kristin J ForbesAbstract: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.
