Recent Developments in the Adoption of Capital Controls in Emerging Economies: Theory and Practice

Abstract

AbstractAfter the global financial crisis, policymakers and researchers have begun to discuss capital control policies—an option that attracted little attention in the past—as a real policy alternative for emerging economies looking to regulate capital flows properly. In this chapter, we first introduce the recent trends in theoretical research on capital control policies. Recent developments in theoretical analyses suggest that capital controls have greater potential for emerging economies as a regular policy instrument than previously thought. Next, we outline how emerging economies use these policies to regulate international capital flows. Recently created indicators of capital control provide a better understanding of changes in capital control policies that are difficult to capture with earlier indicators. The analysis using these new indicators suggests that emerging countries deploy capital control policies more intensively than previously assumed. We also find that significant heterogeneity exists even among emerging countries classified in the same subcategory of “wall,” “gate,” or “open” in terms of capital control policies.KeywordsCapital controlsEmerging economiesFinancial frictionsMacroprudential regulationCredit policyExchange rate system