The Effectiveness of Capital Controls

Abstract

We investigate the effectiveness of capital controls using capital control indicators specific to several asset categories. The effectiveness of these policy instruments is analyzed along different angles. Specifically, we assess whether capital controls are effective in reducing the volume of capital flows, in reducing the probability of capital surges and flights, in strengthening financial stability, and in affecting the exchange rate. Our results point out three main conclusions. Capital controls are generally effective; the effectiveness of capital controls is differentiated for advanced and emerging economies; we find the largest effects on capital flows. We also show that capital controls are associated with a smaller probability of capital surges and flights, and, in emerging economies, with an undervalued exchange rate. We find some evidence that controls are associated with an improved financial stability, by reducing credit growth and FX currency loans: however, this evidence is not fully robust.