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On the Effectiveness of Capital Controls: A Synthetic Control Method Approach

Meng-Ting Chen (Soochow University, Taiwan)
Richard J. Nugent III (Hydrologic Engineering Center, US)

Fintech, Pandemic, and the Financial System: Challenges and Opportunities

ISBN: 978-1-80262-948-4, eISBN: 978-1-80262-947-7

Publication date: 17 January 2023

Abstract

The authors evaluate financial stability and capital flows management objectives of capital controls in the context of four capital control events: removing or imposing controls on capital inflows and removing or imposing controls on capital outflows. The authors use synthetic control method to solve the endogeneity problem stemmed from the timing of capital control implementation. The authors find new evidence that capital controls are not consistently effective in reaching financial stability outcomes but are consistent in reaching capital flows management outcomes. The authors compare our results to estimates using difference-in-difference (DID) and carry out placebo analysis. Finally, we use synthetic DID to correct for the parallel trend bias and show that the results still hold.

Keywords

Acknowledgements

Acknowledgments

We are very grateful for the helpful comments from and discussions with Sangeeta Pratap. We are also thankful for the helpful advice from Merih Uctum and Chun Wang. We acknowledge the helpful feedback from the Hunter College Economics Seminar participants and further conversations with Partha Deb and Matthew Baker. Finally, we would like to acknowledge the helpful comments from Miguel Acosta, Ross Hallren, and Thom Thurston. All mistakes are our own.

Citation

Chen, M.-T. and Nugent, R.J. (2023), "On the Effectiveness of Capital Controls: A Synthetic Control Method Approach", Kim, S.-J. (Ed.) Fintech, Pandemic, and the Financial System: Challenges and Opportunities (International Finance Review, Vol. 22), Emerald Publishing Limited, Leeds, pp. 297-335. https://doi.org/10.1108/S1569-376720220000022014

Publisher

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Emerald Publishing Limited

Copyright © 2023 Meng-Ting Chen and Richard J. Nugent III