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Recent Developments in the Adoption of Capital Controls in Emerging Economies: Theory and Practice

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Global Financial Flows in the Pre- and Post-global Crisis Periods

Abstract

After the global financial crisis, policymakers and researchers have begun to discuss capital control policies—an option that attracted little attention in the past—as a real policy alternative for emerging economies looking to regulate capital flows properly. In this chapter, we first introduce the recent trends in theoretical research on capital control policies. Recent developments in theoretical analyses suggest that capital controls have greater potential for emerging economies as a regular policy instrument than previously thought. Next, we outline how emerging economies use these policies to regulate international capital flows. Recently created indicators of capital control provide a better understanding of changes in capital control policies that are difficult to capture with earlier indicators. The analysis using these new indicators suggests that emerging countries deploy capital control policies more intensively than previously assumed. We also find that significant heterogeneity exists even among emerging countries classified in the same subcategory of “wall,” “gate,” or “open” in terms of capital control policies.

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Notes

  1. 1.

    For details, see Ostry et al. [53, 54].

  2. 2.

    Nispi Landi and Schiavone [52] show that capital controls are generally effective and controls on portfolio inflows are more effective for emerging economies.

  3. 3.

    For the capital inflow problem, see, for example, Agénor [1] and Agénor and Montiel [3].

  4. 4.

    Data source: IMF, World Economic Outlook (April 2018), GDP based on PPP, share of world (Percent of World).

  5. 5.

    Capital controls are not a new policy instrument, however. Even before the recent financial crisis, they have been discussed both theoretically and empirically. For the earlier literature on capital controls, see Kitano [42].

  6. 6.

    Theoretical analyses of capital controls have mainly been related to the issue of currency crises and the capital inflow problem (e.g., Wyplosz [61], Park and Sachs [55], Auernheimer [6], Bacchetta [7], Dellas and Stockman [18], and Bartolini and Drazen [8], Kitano [40], and Kitano [41]).

  7. 7.

    Harberger [33] also argues that externalities accompany foreign borrowing, and policymakers can internalize them through a corrective tax on foreign borrowing.

  8. 8.

    Chang et al. [13] show that there exists a trade-off between inflation and sterilization costs under capital controls and pegs.

  9. 9.

    In the aftermath of the financial crisis, the role of macroprudential regulation has also been discussed (Unsal [60], Ghilardi and Peiris [31], Engel [23], and Nispi Landi [51]). For details, see Kitano and Takaku [46].

  10. 10.

    Shin [59] argues that “a tax on non-core liabilities has many advantages as a prudential tool in dampening the procyclicality of the financial system, especially for emerging economies” (p. 1).

  11. 11.

    Eichengreen and Hausmann [20] refer to this incompleteness in financial markets as the “original sin.”

  12. 12.

    While Kitano and Takaku [44] investigate the role of capital controls as a credit policy tool, Mimir et al. [50] investigate the role of reserve requirements as a credit policy tool.

  13. 13.

    In this sense, our model is close to those presented by Céspedes et al. [12], Devereux et al. [19], and Elekdag and Tchakarov [22].

  14. 14.

    Quinn et al. [56] review numerous indicators of financial openness in detail.

  15. 15.

    Ahmed et al. [4]’s data are available on their website: https://faculty.darden.virginia.edu/warnockf/research.htm.

  16. 16.

    Chen and Qian [14] also compose a new measure that counts changes during specific time intervals by checking the AREAER data. Their data are specific to China, and are available on their website.

  17. 17.

    By using Ahmed et al. [4]’s index, Ghosh et al. [32] show that emerging economies actually respond to capital inflows, whereas Eichengreen and Rose [21] and Fernández et al. [26] argue that capital controls are acyclical and that emerging economies do not respond to economic and financial cycles.

  18. 18.

    See, for example, Alfaro et al. [5].

  19. 19.

    Although Colombia has an overall inflow restrictions index average above 0.70, it is still classified as a “gate” country. This is because Colombia has two years (i.e., 2011 and 2012) when the index is 0.50, which is below the critical level of 0.60.

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Acknowledgements

This work was supported by KAKENHI (20K01744, 20H05633).

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Authors and Affiliations

  1. RIEB, Kobe University, 2-1, Rokkodai, Nada, Kobe, 657-8501, Japan

    Shigeto Kitano

  2. Faculty of International Studies, Hiroshima City University, 3-4-1, Ozuka-Higashi, Asa-Minami-Ku, Hiroshima, 731-3194, Japan

    Kenya Takaku

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Correspondence to Shigeto Kitano .

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  1. Graduate School of Economics, Kobe University, Kobe, Japan

    Yoichi Matsubayashi

  2. RIEB, Kobe University, Kobe, Japan

    Shigeto Kitano

Appendix

Appendix

Ahmed et al. [ 4 ]’s capital control measures for the remaining countries

In Figs. 9.11, 9.13 and 9.15 in the main text, we show Ahmed et al. [4]’s capital control indicators for India, Brazil, and Thailand. In this appendix, we present those for the other 16 sample countries (Malaysia, the Philippines, Poland, Argentina, Taiwan, Indonesia, Korea, Turkey, Colombia, Romania, Chile, Czech Republic, Hungary, Mexico, South Africa, and Israel).

Fig. 9.19
Four graphs depict the evolution of capital control measures in Malaysia. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from minus 20 to 4. The two curves of the graph denote CUM and D I F.

Data Source Ahmed et al. [4]

Malaysia. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image
Fig. 9.20
Four graphs depict the evolution of capital control measures in the Philippines. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from minus 5 to 2. The two curves of the graph denote CUM and D I F. Line remain stable for equity.

Data Source Ahmed et al. [4]

Philippines. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image
Fig. 9.21
Four graphs depict the evolution of capital control measures in Poland. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from minus 6 to 1. The two curves of the graph denote CUM and D I F.

Data Source Ahmed et al. [4]

Poland. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image
Fig. 9.22
Four graphs depict the evolution of capital control measures in Argentina. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from minus 12 to 12. The two curves of the graph denote CUM and D I F.

Data Source Ahmed et al. [4]

Argentina. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image
Fig. 9.23
Four graphs depict the evolution of capital control measures in Taiwan. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from minus 3 to 4. The two curves of the graph denote CUM and D I F.

Data Source Ahmed et al. [4]

Taiwan. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image
Fig. 9.24
Four graphs depict the evolution of capital control measures in Indonesia. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from minus 2 to 7. The two curves of the graph denote CUM and D I F. Line remains stable for equity.

Data Source Ahmed et al. [4]

Indonesia. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image
Fig. 9.25
Four graphs depict the evolution of capital control measures in Korea. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from minus 4 to 10. The two curves of the graph denote CUM and D I F. Line remains stable for equity.

Data Source Ahmed et al. [4]

Korea. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image
Fig. 9.26
Four graphs depict the evolution of capital control measures in Turkey. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from minus 4 to 6. The two curves of the graph denote CUM and D I F. Lines remain stable for equity and bond.

Data Source Ahmed et al. [4]

Turkey. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image
Fig. 9.27
Four graphs depict the evolution of capital control measures in Columbia. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from minus 9 to 9. The two curves of the graph denote CUM and D I F.

Data Source Ahmed et al. [4]

Colombia. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image
Fig. 9.28
Four graphs depict the evolution of capital control measures in Romania. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from minus 2 to 6. The two curves of the graph denote CUM and D I F. Line remains stable for equity and bond.

Data Source Ahmed et al. [4]

Romania. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image
Fig. 9.29
Four graphs depict the evolution of capital control measures in Chile. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from minus 1 to 1. The two curves of the graph denote CUM and D I F. The lines remain stable for all four graphs.

Data Source Ahmed et al. [4]

Chile. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image
Fig. 9.30
Four graphs depict the evolution of capital control measures in the Czech Republic. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from minus 2 to 1. The two curves of the graph denote CUM and D I F. The lines remain stable for equity, bond, and bank.

Data Source Ahmed et al. [4]

Czech Republic. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image
Fig. 9.31
Four graphs depict the evolution of capital control measures in Hungary. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from minus 2 to 1. The two curves of the graph denote CUM and D I F. The lines remain stable for equity and bond

Data Source Ahmed et al. [4]

Hungary. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image
Fig. 9.32
Four graphs depict the evolution of capital control measures in Mexico. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from minus 4 to 2. The two curves of the graph denote CUM and D I F. The lines remain stable for equity and bond.

Data Source Ahmed et al. [4]

Mexico. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image
Fig. 9.33
Four graphs depict the evolution of capital control measures in South Africa. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from minus 3 to 1. The two curves of the graph denote CUM and D I F. Line remain stable for equity and bond.

Data Source Ahmed et al. [4]

South Africa. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image
Fig. 9.34
Four graphs depict the evolution of capital control measures in Israel. The graphs are named Total, Equity, Bond, and Bank. The horizontal axis ranges from 02 to 12 whereas the vertical axis ranges from 0 to 4. The two curves of the graph denote CUM and D I F.

Data Source Ahmed et al. [4]

Israel. Note “CUM” denotes the cumulative number of capital control measures on inflows in each category. “DIF” denotes the first difference of the cumulative series, which indicates the number of new measures introduced in each quarter.

Full size image

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Kitano, S., Takaku, K. (2022). Recent Developments in the Adoption of Capital Controls in Emerging Economies: Theory and Practice. In: Matsubayashi, Y., Kitano, S. (eds) Global Financial Flows in the Pre- and Post-global Crisis Periods. Kobe University Monograph Series in Social Science Research. Springer, Singapore. https://doi.org/10.1007/978-981-19-3613-5_9

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