Do capital controls and macroeconomic policies influence the volume and composition of capital flows? Evidence from the 1990s

Abstract

In the early 1990s capital inflows to Asia were primarily foreign direct investment (FDI). Latin America was attracting little FDI and much more `hot money'. This fed the view that Latin America was more vulnerable to reversals of capital flows than Asia. Yet, regional differences were eroding—the 1997 crises revealed Asia's exposure to short-term capital. We present evidence that capital controls influence the composition of flows, not their volume while sterilized intervention influences volume and composition, skewing flows to short maturities. We conclude that Asia's increasing reliance on `hot money' was largely due to the policy response to the surge in capital inflows.