Do Capital Controls Enhance Monetary Independence?

Yu You, Yoonbai Kim () and Xiaomei Ren

Review of Development Economics, 2014, vol. 18, issue 3, 475-489

Abstract: International monetary policy trilemma—the tradeoff among exchange rate stability, monetary independence, and unrestricted capital mobility—is an important constraint for policy makers in an open economy. This paper investigates an aspect of the hypothesis that has received relatively less attention: whether a decrease in capital mobility through imposition of capital controls, while holding the degree of exchange rate stability constant, will enhance monetary independence. Using a panel dataset covering 88 countries for the 1995–2010 period and the generalized method of moments (GMM) estimation, we find that: (1) capital controls help improve a country's monetary independence; (2) the effectiveness of capital controls depends on the types of assets and the direction of flows that are imposed; and (3) the choice of exchange rate regime has an important impact on the effectiveness of capital controls on monetary independence.

Date: 2014
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