How Effective are Capital Controls? Evidence from Malaysia

Prema-chandra Athukorala and Juthathip Jongwanich

Departmental Working Papers from The Australian National University, Arndt-Corden Department of Economics

Abstract: This paper examines the role of capital controls as a macroeconomic policy tool in light of the Malaysian experience. It consists of an econometric analysis of quarterly data over the period 1990–2010 using newly constructed capital inflow and outflow policy indexes as well as analytical narratives of episodes of controls imposed on inflows (1994) and outflows (1998–1999). The findings suggest that well-targeted controls have the potential to tame both short-term capital inflows and outflows without exerting a backwash effect on foreign direct investment, at least in the short to medium term. Controls on capital inflows introduced in the first half of 1994 helped moderate accumulation of short-term capital flows, particularly short-term bank credit. During 1998–1999, carefully designed temporary capital controls were successful in providing Malaysian policymakers a viable setting for applying the standard Keynesian therapy.

Keywords: Malaysia; Capital controls; financial crisis (search for similar items in EconPapers)
JEL-codes: F32 F41 O53 (search for similar items in EconPapers)
Pages: 55
Date: 2012
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Citations: View citations in EconPapers (14)

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