Capital Controls, Capital Flow Contractions, and Macroeconomic Vulnerability

Sebastian Edwards

No 12852, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper I analyze whether restrictions to capital mobility reduce vulnerability to external shocks. More specifically, I ask if countries that restrict the free flow of international capital have a lower probability of experiencing a large contraction in net capital flows. I use three new indexes on the degree of international financial integration and a large multi-country data set for 1970-2004 to estimate a series of random-effect probit equations. I find that the marginal effect of higher capital mobility on the probability of a capital flow contraction is positive and statistically significant, but very small. Having a flexible exchange rate greatly reduces the probability of experiencing a capital flow contraction. The benefits of flexible rates increase as the degree of capital mobility increases. A higher current account deficit increases the probability of a capital flow contraction, while a higher ratio of FDI to GDP reduces that probability.

JEL-codes: F3 F32 F34 (search for similar items in EconPapers)
Date: 2007-01
New Economics Papers: this item is included in nep-cba and nep-ifn
Note: IFM
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Citations: View citations in EconPapers (73)

Published as Edwards, Sebastian, 2007. "Capital controls, capital flow contractions, and macroeconomic vulnerability," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 814-840, September.

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Journal Article: Capital controls, capital flow contractions, and macroeconomic vulnerability (2007)
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