Capital Controls: Theory and Evidence

Bilge Erten, Anton Korinek and José Antonio Ocampo

No 26447, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper synthesizes recent advances in the theoretical and empirical literature on capital controls. We start by observing that international capital flows have both benefits and costs, but some of these are not internalized by individual actors and thus constitute externalities. The theoretical literature has identified pecuniary externalities and aggregate demand externalities that respectively contribute to financial instability and recessions. These externalities provide a natural rationale for counter-cyclical capital controls that lean against boom and busts cycles in international capital flows. The empirical literature has developed several measures of capital controls to capture different aspects of capital account openness. We evaluate the strengths and weaknesses of different measures and provide an overview of the empirical findings on the effectiveness of capital controls in addressing the externalities identified by the theory literature, i.e. in reducing financial fragility and enhancing macroeconomic stability. We also discuss strategies to deal with the endogeneity of capital controls in such statistical exercises. We conclude by providing an overview of the historical and current debates on the role of capital controls in macroeconomic management and their relationship to the academic literature.

JEL-codes: D62 E44 F32 F38 F42 H23 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-fdg, nep-mac, nep-mon, nep-opm and nep-pke
Note: AP IFM ME
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Citations: View citations in EconPapers (29)

Published as Bilge Erten & Anton Korinek & José Antonio Ocampo, 2021. "Capital Controls: Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 59(1), pages 45-89, March.

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