Capital Flow Deflection

Paolo Giordani, Michele Ruta, Hans Weisfeld and Ling Zhu

No 2014/145, IMF Working Papers from International Monetary Fund

Abstract: This paper focuses on the coordination problem among borrowing countries imposing controls on capital infl ows. In a simple model of capital flows and controls, we show that inflow restrictions distort international capital flows to other countries and that, in turn, such capital flow deflection may lead to a policy response. We then test the theory using data on inflow restrictions and gross capital inflows for a large sample of developing countries between 1995 and 2009. Our estimation yields strong evidence that capital controls deflect capital flows to other borrowing countries with similar economic characteristics. Notwithstanding these strong cross-border spillover effects, we do not find evidence of a policy response.

Keywords: WP; capital control; interest rate; capital flows; capital controls; cross-border spillovers; policy response; flow deflection; borrowing country; inflow control; spillover effect; capital flow deflection; Capital inflows; Real interest rates; Capital outflows; Global; Africa (search for similar items in EconPapers)
Pages: 47
Date: 2014-08-08
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Citations: View citations in EconPapers (20)

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Journal Article: Capital flow deflection (2017)
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