Testing the Effectiveness of Market-Based Controls: Evidence from the Experience of Japan with Short-Term Capital Flows in the 1970s

Taro Esaka () and Shinji Takagi
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Taro Esaka: Kobe City University of Foreign Studies

No 12-03, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: The paper tests the effectiveness of marginal reserve requirements employed by the Japanese authorities in the 1970s to influence short-term capital flows, thereby contributing to the ongoing debate on the use of capital controls \market- or price-based ones in particular. While the case for using market-based controls almost entirely relies on the mixed evidence from the experience of Chile with unremunerated reserve requirements in the 1990s, testing for their effectiveness on the volume of inflows is hampered by the endogeneity of such a measure, which is typically imposed or intensified when inflows surge. We address this problem by applying the method of propensity score matching and find that an increase in marginal reserve requirements modestly reduced the volume of short-term capital inflows through non-resident free-yen accounts. The impact was not statistically significant, however, implying that the price elasticity of short-term capital flows was small. We conclude that market-based controls must be nearly prohibitive, perhaps combined with administrative measures, to be effective in a meaningful way.

Keywords: market-based capital controls; price-based capital controls; effectiveness of capital controls; Japanese capital controls; propensity score matching (search for similar items in EconPapers)
JEL-codes: F32 N25 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2012-03
New Economics Papers: this item is included in nep-ifn
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Citations: View citations in EconPapers (1)

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Journal Article: Testing the Effectiveness of Market-Based Controls: Evidence From the Experience of Japan With Short-Term Capital Flows in the 1970s (2013)
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