In recent years the use of capital controls has been rising. This work analyses the impact of these policy tools on a set of variables (such as the volume and the volatility of capital flows, domestic credit and the exchange rate) for a wide sample of countries from 1997 to 2015. The effect is estimated by distinguishing by type of controls (on direct investment, portfolio and banking flows) and accounting for the number of restrictions in place.
Controls reduce the volume of capital flows, even if the effects vary across investment types and between emerging and advanced economies. Controls tend to reduce the volatility of capital flows and foreign exchange borrowing. The effects on domestic credit are driven by advanced economies. Finally, capital controls are associated with a depreciation of the exchange rate in relation to the equilibrium level.
Forthcoming in: Open Economies Review
