Are Controls Effective in Curbing Private Capital Flows in Colombia? A Time-Series Analysis

Juan Diego Lopez Rodriguez and Miguel Ramirez

Journal of Empirical Economics, 2016, vol. 5, issue 1, 23-34

Abstract: In view of the surge in short-term private capital flows to Colombia and other emerging markets in recent years, housing-price and stock market bubbles have emerged; therefore, the study of the relative effectiveness of controls on private capital flows is a timely and important topic to undertake. Did the non-remunerated reserve requirement imposed on private capital inflows in Colombia decrease the total stock of flows? Following the empirical work of Cárdenas and Steiner (2000), this study modifies their work by adding a second period of controls for Colombia, as well as undertaking a unit root and vector error cointegration analysis. The study finds that controls were not capable of decreasing the total amount of private capital inflows in the short-run, but they were able to do so in the long run. These findings demonstrate that, in the case of Colombia, the careful and nuanced use of controls can (and should) be used by policymakers as an important instrument to prevent volatility in the real exchange rate in a world of increasing financial integration.

Date: 2016
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