Asymmetric impact of capital controls on international trade

Abstract

Capital control policies have asymmetric effects on international trade. This study uses quarterly data on 25 emerging countries from 2011 to 2019. Our empirical approach performs long- and short-standing capital controls dynamic panel models, and applies different robust estimations techniques. We find evidence that capital controls mitigate the adverse effect of the exchange rate, interest rate differential, and inflation volatilities. The long-lasting capital controls « walls » are more effective than short-lasting capital control « gates». Besides, the effects of these controls are asymmetric according to their procyclical behavior and the financial development level. Capital controls impact on international trade raises two major policy implications. Targeting long-lasting controls is more useful than targeting episodic controls, and policy coordination between exchange rate, monetary, and restrictive policies is necessary to support international trade.