Abstract
This study examines the impact of capital controls using monthly information to construct higher-frequency, quarterly indexes for Malaysia and Thailand over the period 2000–2010 in a Vector Auto-Regression (VAR) model. The results show that effectiveness of a capital control policy is not identical between Malaysia and Thailand. This could result from country-specific factors, the form of capital controls as well as degree of efficacy, which vary greatly between these two countries. Restrictions in Thailand have no significant effect on inflows but are especially effective for outflows, particularly foreign direct investment. In Malaysia, capital relaxation tends to have a significant impact on inward foreign direct investment and portfolio inflows. However, the results show that changes in capital account policies do not have a significant impact on the real exchange rate in both Malaysia and Thailand.
Highlights
Policy makers in Asia have remained reluctant to completely do away with capital controls despite pursuing an overall strategy of economic liberalization since the early 1990s
Changes in capital account restrictions do not have a significant impact on the real exchange rate in both Malaysia and Thailand
The effect peaks in the second quarter for both types of inflows but the effects tend to last longer for foreign direct investment (FDI)—10 quarters compared with six quarters for portfolio investment
Summary
Policy makers in Asia have remained reluctant to completely do away with capital controls despite pursuing an overall strategy of economic liberalization since the early 1990s. In the 1990s, capital controls were only temporarily able to drive a wedge between foreign and domestic interest rates and to reduce pressures on the exchange rate in countries such as Brazil, Chile, Colombia, Malaysia, and Thailand (Ariyoshi et al 2000). The apparent success of Malaysia in using capital controls during the Asian financial crisis of 1997–1998 resurrected interest in their use in the postcrisis period when many countries in Asia experienced both large capital inflows and currency appreciation. This study examines the effects of restrictions on the volume of capital flows (aggregate, inflows, and outflows), and on particular asset categories of capital flows (portfolio, direct, and other investment flows).
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