Abstract
This paper examines the effectiveness of capital account policy in terms of its ability to affect the volume and composition of capital flows, relieve pressures on real exchange rates, and foster monetary policy independence. Ten emerging Asian economies are used as case studies to assess the effectiveness of capital account policy during 2000–2015. The results suggest that some types of capital controls are effective in reducing the volume of capital flows and pressure on real exchange rates. The choice of exchange rate regime matters in terms of the effectiveness of capital controls for fostering monetary policy independence. Although some types of capital controls are effective in creating macroeconomic stability, implementing capital account policy needs to be undertaken with caution. This is because substitution or complementarity among capital controls is evident, both within and across countries in the region. It seems that strong economic fundamentals are more important than capital account policy for changing the composition of capital inflows toward more stable and long-term flows.
Highlights
The debate on the use of capital account policies as a part of the toolbox to ensure macroeconomic stability has been revived in the new millennium.1 This is not surprising given the 1997–1998 Asian financial crisis and the continuing challenges facing the global economic environment, especially those spawned by the 2008 global financial crisis
Despite the mixed empirical evidence, capital account policies are still being used worldwide. It is against this backdrop that this paper systematically examines the effectiveness of capital account policies in emerging Asia during 2000–2015.2 Their effectiveness is examined from four perspectives: (i) their ability to affect the volume of capital flows, (ii) their ability to affect the composition of capital inflows toward direct investment inflows, (iii) their ability to redress pressure on real exchange rate appreciation, and (iv) their ability to foster increased monetary independence
This paper examined the effectiveness of capital account policy in terms of its ability to (i) affect the volume of capital flows; (ii) affect the composition of capital inflows toward long-term investment, especially direct investment; (iii) relieve pressures on real exchange rates; and (iv) foster monetary policy independence
Summary
The debate on the use of capital account policies as a part of the toolbox to ensure macroeconomic stability has been revived in the new millennium. This is not surprising given the 1997–1998 Asian financial crisis and the continuing challenges facing the global economic environment, especially those spawned by the 2008 global financial crisis. A number of emerging economies experienced large capital inflows and sharp currency appreciation, especially from mid-2006 to mid-2008 and even after the global financial crisis These developments have reawakened interest in capital controls. Despite the mixed empirical evidence, capital account policies are still being used worldwide It is against this backdrop that this paper systematically examines the effectiveness of capital account policies in emerging Asia during 2000–2015.2 Their effectiveness is examined from four perspectives: (i) their ability to affect the volume of capital flows, (ii) their ability to affect the composition of capital inflows toward direct investment inflows, (iii) their ability to redress pressure on real exchange rate appreciation, and (iv) their ability to foster increased monetary independence. The latter possibility is called capital flow deflection in Forbes et al (2016) and Giordani et al (2017)
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