Motivations for capital controls and their effectiveness

Abstract

AbstractWe assess the motivations for changing capital controls and their effectiveness in India, a country with the legal and administrative machinery to implement controls. We focus on the controls on foreign borrowing that can, in principle, be motivated by macroprudential concerns. We construct a fine‐grained dataset of capital control actions on foreign borrowing in India. Using event study methodology, we assess the factors that motivate these capital control actions. We find that capital controls are tightened after appreciation and eased after depreciation of the exchange rate. We also assess the impact of controls. The results suggest no impact of capital controls on most variables, including the currency.