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Article
Publication date: 3 June 2021

Chokri Zehri

By reinforcing monetary policy independence, reducing international financing pressures and avoiding high-risk takings, capital controls strengthen the stability of the…

Abstract

Purpose

By reinforcing monetary policy independence, reducing international financing pressures and avoiding high-risk takings, capital controls strengthen the stability of the financial system and then reduce the volatility of capital inflows. The objective of this study was to conduct an empirical examination of this hypothesis. This topic has received strong support in the theoretical literature; however, empirical work has been quite limited, with few empirical studies that provide direct empirical support to this hypothesis.

Design/methodology/approach

This study analyzed quarterly data of 32 emerging economies over the period between 2000 and 2015 and proposes two methods to identify capital control actions. Using panel analysis, Autoregressive Distributed Lag and local projections approaches.

Findings

This study found that tighter capital controls may diminish monetary and exchange rate shocks and reduce capital inflows volatility. Furthermore, capital controls respond counter-cyclically to monetary shocks. Under capital controls, countries with floating exchange rate regimes have more potential to buffer monetary shocks. We also found that capital controls on inflows are more effective for reducing the volatility of capital inflows compared to capital controls on outflows.

Originality/value

This study contributes to the question of the effectiveness of capital controls in attenuating the effects of international shocks and reducing the volatility of capital flows. Previous studies have mostly focused on the role of macroprudential regulation; however, there is a lack of systematic effects of capital controls on monetary and exchange rate policies. To our knowledge, this is the first preliminary study to suggest that capital controls may buffer monetary and exchange rate shocks and reduce the volatility of capital inflows. This study investigates the novel notion that capital controls allow for a notable counter-cyclical response of monetary and exchange rate policies to international financial shocks.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 13 March 2020

Biplab Kumar Guru and Inder Sekhar Yadav

This study empirically examines the effect of capital controls on the volume and composition of capital flows at aggregated as well as at disaggregated level by different…

Abstract

Purpose

This study empirically examines the effect of capital controls on the volume and composition of capital flows at aggregated as well as at disaggregated level by different asset classes such as debt, FDI, equity, and derivatives.

Design/methodology/approach

Several dynamic panel SYS-GMM models are employed on two sets of unique data on cross-border capital flows and capital control index along with control variables at aggregated and disaggregated level by different asset classes during 1995–2015 for a sample of 31 Asian economies.

Findings

Econometric findings suggest that higher capital controls effectively reduce gross capital flows. The reduction in gross capital flows is largely found to be on account of effectiveness of controls on equity flows. However, the impact of controls on overall debt and derivative flows is found to be insignificant. Further, it was found that an increase in direct capital controls disaggregated by inflow and outflow categories significantly reduced the inflow of debt and equity + FDI flows and outflow of equity + FDI and derivative flows. Finally, the study did not find any substitution effect (due to indirect controls) and net effect on capital flows.

Practical implications

Results of such empirical examination may enable governments in respective countries to pursue prudent and rational capital controls as a shield against capital flight and shock transmission.

Social implications

Preventing capital flight through effective controls has macroeconomic benefits such as maintaining stability in income, growth, interest rate, exchange rate, and employment levels for the society.

Originality/value

The primary contribution of the study is the analysis of effectiveness of capital controls disaggregated by different asset categories such as debt, equity, FDI, and derivatives using two unique recent data sets for a large sample of Asian economies.

Details

Journal of Economic Studies, vol. 47 no. 2
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 14 September 2015

Peter Yeoh

The purpose of this paper is to review the practicality and implications of capital controls in emerging economies in the international financial landscape subsequent to…

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Abstract

Purpose

The purpose of this paper is to review the practicality and implications of capital controls in emerging economies in the international financial landscape subsequent to the 1997 Asian financial crisis (AFC) and the 2008 global financial crisis (GFC).

Design/methodology/approach

The doctrinal approach used in this study relies primarily on primary data from relevant statutes and regulations in the capital and financial markets, and secondary data from research findings of published sources available in the public domain. It also makes concurrent use of the case study approach.

Findings

The disdain over the use of capital controls by emerging economies such as Malaysia in the 1997 AFC by multilateral agencies like the International Monetary Fund (IMF) since then and particularly after the 2008 GFC and the 2011/2012 European financial crisis (EFC) has been quietly and gradually transformed into a viable policy option under defined circumstances, especially at the IMF and global forums like the G20. The 1997 AFC in particular induced East Asian economies and others to strengthen the macroeconomic and financial positions, such that they were not only able to withstand the impacts of the 2008 GFC and the 2011/2012 EFC but also contributed to their gradual recoveries through their participation as net lenders to the IMF. The enhanced confidence of these emerging economies to use various capital controls without seeking IMF support spawned new thinking at the IMF to result in the introduction of policy guidelines sanctioning the use of capital controls under particular circumstances.

Research limitations/implications

The paper is constrained by the usual limitations connected with qualitative studies, but this is generally mitigated by triangulation of perspectives and so on.

Originality/value

This paper provides a critical overview of the pros and cons of capital controls. In particular, it analyses the implications of capital controls as a policy option for emerging economies when facing severe financial crisis. It also critically discusses how and why flowing from the aftermath of its application by Malaysia in the 1997 AFC and subsequent employment by other successful emerging economies in response to the 2008 GFC and 2011/2012 EFC, multilateral institutions such as the IMF and international forum like the G20 developed a more positive approach toward the use of capital controls.

Details

International Journal of Law and Management, vol. 57 no. 5
Type: Research Article
ISSN: 1754-243X

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Article
Publication date: 1 December 2004

Pearl M. Kamer

The 1997‐1998 Asian financial crises underscored the dangers of open capital accounts in developing nations that have weak macroeconomic policies or poorly regulated…

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2028

Abstract

The 1997‐1998 Asian financial crises underscored the dangers of open capital accounts in developing nations that have weak macroeconomic policies or poorly regulated financial systems. Most developing Asian countries responded to the crisis by adopting the orthodox remedies prescribed by the International Monetary Fund. These included liberalised capital accounts, floating exchange rates and tighter fiscal and monetary policies designed to restore investor confidence. Malaysia departed from this orthodoxy. In September 1998 it imposed controls on capital account transactions, pegged its currency to the US dollar, cut interest rates and reflated its economy. The literature suggests that even temporary capital account controls entail serious economic risks for developing countries. However, the undue hardships imposed by the IMF regimen suggest that it is time to re‐evaluate the role of currency controls in mitigating the destabilising effects of unfettered capital flows in developing countries that have poorly regulated financial systems. This article analyses the effectiveness of Malaysia’s 1998 capital controls by evaluating Malaysia’s post‐1998 economic progress. Its goal is to inform the debate concerning the benefit‐risk tradeoffs of currency controls in developing countries.

Details

Cross Cultural Management: An International Journal, vol. 11 no. 4
Type: Research Article
ISSN: 1352-7606

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Article
Publication date: 30 August 2013

Fouzia Amin and Sanmugam Annamalah

This research has been carried out to look into the long run impact of the controls on capital inflows imposed during the years 1998‐2001 in Malaysia. The paper intends to…

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1846

Abstract

Purpose

This research has been carried out to look into the long run impact of the controls on capital inflows imposed during the years 1998‐2001 in Malaysia. The paper intends to capture the long‐term impact of capital controls in changing the composition of capital flows into Malaysia and to examine whether the controls have been able to divert the short‐term capital inflows to longer‐term investments.

Design/methodology/approach

The autoregressive first differenced ordinary least square models have been used to examine whether the controls have been able to divert the short‐term capital inflows to longer‐term investments.

Findings

The capital controls have been successful in the short run in switching some of the short‐term capital inflows into longer‐term portfolio investments, without jeopardizing the Malaysian investment environment in the longer‐term. Such controls did not have an impact on the decisions of foreign investors in the long run even if the rating agencies downgraded the Malaysian investments immediately after the controls were imposed. This paper suggests that capital flows into Malaysia were more a result of interest rate differentials between the domestic and the US interest rates and hardly depended on the Malaysian risk adjusted returns.

Research limitations/implications

One of the limitations of this research is the ephemeral nature of the econometric analysis. All the variables, except government spending, are first differenced, in order to overcome the problem of spurious regression. However, while taking the first difference, there is a possibility of losing valuable long‐term relationship between the capital flows and the explanatory variables. Further, the analysis was carried out without much reference to the derivative market, which might have disguised some of the capital flows.

Social implications

Capital controls are adopted to prevent the volatility in domestic markets caused due to capital flight. The capital flight has huge macroeconomic implications on a society, including unemployment, interest rate volatility and subsequent economic slowdown and recession. If adopted with an intention to provide a temporary breathing space, it might help the countries manage their domestic imbalances.

Originality/value

This paper provides a fresh look at the implications of capital controls with longer‐term data that also include the period after the controls were withdrawn. The study is expected to be independent of market distortions, which might arise with narrow time frames that cover periods during and/or immediately after the crisis.

Details

Journal of Economic Studies, vol. 40 no. 4
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 1 August 2016

Babu G. Baradwaj, Yingying Shao and Michaël Dewally

The purpose of this study is to conduct an empirical investigation on how country-specific characteristics such as the quality of the institutional environment and the…

Abstract

Purpose

The purpose of this study is to conduct an empirical investigation on how country-specific characteristics such as the quality of the institutional environment and the restrictiveness of capital control policy affect domestic financial sector’s ability to provide liquidity to the economy.

Design/methodology/approach

This study uses panel regressions on international banking data across 102 countries from Bankscope.

Findings

The results show that strong institutions and looser capital control in a country enhance the banks’ role as the liquidity provider to the economy. The study also finds that institutional quality and capital control have a dynamic effect that influences the creation of liquidity. Better institutions benefit the creation of liquidity in either under normal economic conditions or during economic downturn. Loosened capital control, as a result of financial openness, facilitates liquidity creation under normal economic conditions.

Originality/value

This study complements the research on the role of country-level institutions in financial and economic development and suggests a liquidity channel through which a country’s institutions can further economic growth. The study also provides evidence on the impact of a country’s control of capital flows on the role of banking sector in domestic economy.

Details

Journal of Financial Economic Policy, vol. 8 no. 3
Type: Research Article
ISSN: 1757-6385

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Article
Publication date: 1 January 1983

R.G.B. Fyffe

This book is a policy proposal aimed at the democratic left. It is concerned with gradual but radical reform of the socio‐economic system. An integrated policy of…

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9906

Abstract

This book is a policy proposal aimed at the democratic left. It is concerned with gradual but radical reform of the socio‐economic system. An integrated policy of industrial and economic democracy, which centres around the establishment of a new sector of employee‐controlled enterprises, is presented. The proposal would retain the mix‐ed economy, but transform it into a much better “mixture”, with increased employee‐power in all sectors. While there is much of enduring value in our liberal western way of life, gross inequalities of wealth and power persist in our society.

Details

International Journal of Sociology and Social Policy, vol. 3 no. 1/2
Type: Research Article
ISSN: 0144-333X

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Book part
Publication date: 21 December 2010

Raul Razo-Garcia

This chapter deals with the estimation of the effect of exchange rate flexibility on financial account openness. The purpose of our analysis is twofold: On the one hand…

Abstract

This chapter deals with the estimation of the effect of exchange rate flexibility on financial account openness. The purpose of our analysis is twofold: On the one hand, we try to quantify the differences in the estimated parameters when exchange rate flexibility is treated as an exogenous regressor. On the other hand, we try to identify how two different degrees of exchange rate flexibility (intermediate vs floating regimes) affect the propensity of opening the financial account. We argue that a simultaneous determination of exchange rate and financial account policies must be acknowledged in order to obtain reliable estimates of their interaction and determinants. Using a panel data set of advanced countries and emerging markets, a trivariate probit model is estimated via a maximum simulated likelihood approach. In line with the monetary policy trilemma, our results show that countries switching from an intermediate regime to a floating arrangement are more likely to remove capital controls. In addition, the estimated coefficients exhibit important differences when exchange rate flexibility is treated as an exogenous regressor relative to the case when it is treated as endogenous.

Details

Maximum Simulated Likelihood Methods and Applications
Type: Book
ISBN: 978-0-85724-150-4

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Book part
Publication date: 8 March 2011

Yin-Wong Cheung and XingWang Qian

We study the empirical determinants of the Chinese renminbi (RMB) covered interest differential. The canonical macroeconomic variables including capital flight and the…

Abstract

We study the empirical determinants of the Chinese renminbi (RMB) covered interest differential. The canonical macroeconomic variables including capital flight and the factors that affect country risk, and a few China-specific regulatory and institutional factors are considered. It is found that the effects of these canonical macroeconomic variables on the RMB covered interest differential are largely consistent with those reported in the literature. Further, the covered interest differential was affected by China's general capital control policy and its exchange rate reform program, but not its political risk index. The effects of these explanatory variables on the covered interest differential appear to work mainly via the forward premium rather than the interest rate differential component. The results are largely the same across the onshore and offshore RMB forward rates that cover different sample periods.

Details

The Evolving Role of Asia in Global Finance
Type: Book
ISBN: 978-0-85724-745-2

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Article
Publication date: 28 August 2019

Thales Pacific Yapatake Kossele and Magalie Gabriella Ngaba Mbai-Akem

The purpose of this paper is to investigate the effect of corruption control on capital flight in the least corrupt African countries.

Abstract

Purpose

The purpose of this paper is to investigate the effect of corruption control on capital flight in the least corrupt African countries.

Design/methodology/approach

Using panel data covering the period of 1996-2010.

Findings

The results show that the extent of corruption, the total natural resources rent are statistically significant and affect positively the capital across the pooled, random and fixed effects. Inflation and economic growth are also found to have a negative impact on capital flight. Moreover, the exchange rate has a negative and significant effect on capital flight.

Practical implications

The findings of this study suggest that the extent of corruption control by responsible institutions can be considered as one of the most effective weapons in the fight against capital flight in the least corrupt African countries.

Social implications

The paper recommends to the government of the least corrupt countries in Africa to create an enabling political and economic environment for investor’s attractiveness. This, in turn, will reduce the occurrence of capital flight and lead to the sustainable development.

Originality/value

The findings of this study suggest that the extent of corruption control by responsible institutions can be considered as one of the most effective weapons in the fight against capital flight in the least corrupt African countries. The paper recommends to the government of the least corrupt countries in Africa to create an enabling political and economic environment for investor’s attractiveness. This, in turn, will reduce the occurrence of capital flight and lead to the sustainable development.

Details

Indian Growth and Development Review, vol. 13 no. 3
Type: Research Article
ISSN: 1753-8254

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