The Exceptions that Prove the Rule? Revisiting the effectiveness of Capital Controls Under International Investment Agreements

Giovanni Donato ()
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Giovanni Donato: Geneva Graduate Institute, International Economics

No 17-2025, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: This paper examines how international investment agreements constrain the use and effectiveness of capital controls in emerging and developing economies. Leveraging a novel database on the specific content of investment treaties, I identify those that include "macro-stability exceptions", which allow countries to derogate from their legal obliga-tions in times of crisis. Although theoretical models highlight the effectiveness of capital controls in moderating capital flows, empirical evidence remains inconclusive. I argue that this is partly due to the potential conflict between capital controls and countries' treaty commitments, and to the limited attention given to endogeneity bias in existing stud-ies. To address this identification challenge, I construct two indicators of policy space restriction and flexibility, reflecting the content of countries' investment agreements in force, which I use as instruments for capital controls on outflows. Instrumental Variable (IV) estimates reveal that capital controls have a statistically significant causal effect on sudden stops. However, the direction of the effect differs across investment types. More-over, countries with more restrictive treaty commitments are less likely to deploy capital controls, whereas those with greater policy space due to macro-stability exceptions use controls more extensively.

Keywords: International Investment Agreements; Exceptions; Capital Controls; Sudden Stops; Instrumental Variable (search for similar items in EconPapers)
JEL-codes: F32 F38 F42 G28 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2025-11-04
New Economics Papers: this item is included in nep-fdg and nep-opm
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