Capital Controls on Outflows: New Evidence and a Theoretical Framework

Roberto Chang, Andrés Fernández and Humberto Martinez

No 2024/164, IMF Working Papers from International Monetary Fund

Abstract: We study capital controls on outflows (CCOs) in situations of macroeconomic and financial distress. We present novel empirical evidence indicating that CCO implementation is associated with crises and declines in GDP growth. We then develop a theoretical framework that is consistent with such empirical findings and also yields policy and welfare lessons. The theory features costly coordination failures by foreign investors which can sometimes be avoided by suitably tailored CCOs. The benefits of CCOs as coordination devices can make them optimal even if CCOs entail deadweight losses; if the latter are large, however, CCOs are detrimental for welfare. We show that optimal CCOs can suffer from time inconsistency, and also how political opportunism may limit CCO policy. Hence government credibility and reputation building emerge as critical for the successful implementation of CCOs.

Keywords: Capital Flows; Capital Controls; Coordination Failures; Reputation; Time Inconsistency; CCO policy; CCOS entail deadweight loss; CCO implementation; discretionary CCO Policy; costless capital; Capital outflows; Capital flow management; Institutional View on capital flows; Global (search for similar items in EconPapers)
Pages: 83
Date: 2024-07-26
New Economics Papers: this item is included in nep-fdg and nep-mon
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Working Paper: Capital Controls on Outflows: New Evidence and a Theoretical Framework (2024)
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