Capital Flow Deflection

Author/Editor: Paolo Giordani ; Michele Ruta ; Hans Weisfeld ; Ling Zhu
Publication Date: August 08, 2014
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: This paper focuses on the coordination problem among borrowing countries imposing controls on capital infl ows. In a simple model of capital flows and controls, we show that inflow restrictions distort international capital flows to other countries and that, in turn, such capital flow deflection may lead to a policy response. We then test the theory using data on inflow restrictions and gross capital inflows for a large sample of developing countries between 1995 and 2009. Our estimation yields strong evidence that capital controls deflect capital flows to other borrowing countries with similar economic characteristics. Notwithstanding these strong cross-border spillover effects, we do not find evidence of a policy response.
Series: Working Paper No. 14/145
Subject(s): Capital flows | Capital controls | Capital inflows | Spillovers | Econometric models

Publication Date: August 08, 2014
ISBN/ISSN: 9781498383202/1018-5941 Format: Paper
Stock No: WPIEA2014145 Pages: 47
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