The illusive quest: do international capital controls contribute to currency stability?

Reuven Glick and Michael Hutchison

No 2010-15, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We investigate the effectiveness of capital controls in insulating economies from currency crises, focusing in particular on both direct and indirect effects of capital controls and how these relationships may have changed over time in response to global financial liberalization and the greater mobility of international capital. We predict the likelihood of currency crises using standard macroeconomic variables and a probit equation estimation methodology with random effects. We employ a comprehensive panel data set comprised of 69 emerging market and developing economies over 1975?2004. Both standard and duration-adjusted measures of capital control intensity (allowing controls to \"depreciate\" over time) suggest that capital controls have not effectively insulated economies from currency crises at any time during our sample period. Maintaining real GDP growth and limiting real overvaluation are critical factors preventing currency crises, not capital controls. However, the presence of capital controls greatly increases the sensitivity of currency crises to changes in real GDP growth and real exchange rate overvaluation, making countries more vulnerable to changes in fundamentals. Our model suggests that emerging markets weathered the 2007-08 crisis relatively well because of strong output growth and exchange rate flexibility that limited overvaluation of their currencies.

Keywords: Financial crises; Capital market; Emerging markets; Econometric models; Panel analysis (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-ifn, nep-mon, nep-opm and nep-reg
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.frbsf.org/publications/economics/papers/2010/wp10-15bk.pdf (application/pdf)

Related works:
Journal Article: The illusive quest: Do international capital controls contribute to currency stability? (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:2010-15

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Paper Series from Federal Reserve Bank of San Francisco Contact information at EDIRC.
Bibliographic data for series maintained by Federal Reserve Bank of San Francisco Research Library ().