Effectiveness of capital controls in dampening international shocks

Chokri Zehri
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Chokri Zehri: Department of Business Administration, College of Sciences and Humanities – Slayel, Prince Sattam Bin Abdulaziz University, Al-Kharj, Saudi Arabia

Review of Keynesian Economics, 2021, vol. 9, issue 4, 521–551

Abstract: This study is a contribution to the ongoing debate on whether capital controls are effective in buffering international shocks and reducing capital flows volatility. The author demonstrates that capital controls can considerably mitigate the effects of monetary and exchange rate shocks and reduce the volatility of capital inflows to emerging markets. This study analyses quarterly data of 28 emerging economies over the period between 2000 and 2015 and proposes two methods to identify capital controls actions. Using panel analysis, autoregressive distributed lag, and local projections approaches, this study finds that tighter capital controls may diminish monetary and exchange rate shocks and reduce capital inflows volatility. Furthermore, capital controls respond anti-cyclically to monetary shocks. Under capital controls, countries with floating exchange rate regimes have more potential to buffer monetary shocks. The author also finds that capital controls on inflows are more effective for reducing the volatility of capital flows compared to capital controls on outflows.

Keywords: volatility; flows; capital controls; international shocks (search for similar items in EconPapers)
JEL-codes: F30 F36 F38 F42 (search for similar items in EconPapers)
Date: 2021
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