The domestic impacts and spillovers of capital controls

Abstract

The effectiveness of capital controls has still not been established, and if they are indefinite they create distortions. This study uses quarterly data on capital controls in 25 Asian and Latin American countries from 2000 to 2019. We present further evidence on the internal and multilateral impacts of capital controls using a Panel VAR model with variance decomposition and impulse-response function analysis. The results show that domestically, capital controls, became more effective after the global financial crisis, with more monetary policy autonomy and exchange rate policy stability. Contrarily, these controls do not affect international reserve accumulation, and a combination of policies, capital controls, and reserves is required to assist governments’ decisions. Internationally, capital controls cause negative spillovers that require policy coordination between the countries setting controls and those consequently receiving massive inflows.

Keywords

• capital controls
• monetarypolicy
• exchange rate policy
• reserves
• spillovers