Capital flow deflection under the magnifying glass

Filippo Gori, Etienne Lepers and Caroline Mehigan

International Journal of Finance & Economics, 2024, vol. 29, issue 3, 3758-3778

Abstract: Leveraging on a new quarterly dataset of capital control adjustments, we find renewed evidence that the introduction or tightening of capital controls in one economy increases capital inflows to other similar borrowing economies, an effect often called capital flow deflection. However, not all flows are deflected alike. Capital flow deflection is primarily driven by portfolio investment and bank credit, and only controls targeting these types of flows generate this externality. Moreover, analysing bilateral capital flows in order to capture investing countries' characteristics, we find that capital controls tend to deflect flows from advanced economies' portfolio equity investors, while controls on bank‐related flows primarily deflects lending from emerging market banks.

Date: 2024
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https://doi.org/10.1002/ijfe.2847

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Working Paper: Capital flow deflection under the magnifying glass (2020)
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