Do Capital Controls Limit Inflow Surges?

IMF Working Papers, March 10, 2023

Source details

Authors: Apoorv Bhargava, Romain Bouis, Annamaria Kokenyne, Manuel Perez-Archila, Umang Rawat, Ratna Sahay
Published: March 10, 2023
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400235092.001

With rising financial integration, the magnitude and swings in capital flows have increased in the past two decades, intensifying the policy debate on how best to deal with these flows.
This paper assesses the use and effectiveness of capital controls in limiting inflow surges using a novel dataset on capital control changes across 40 advanced and emerging market and developing economies over 1995-2018.
Main headline finding: the tightening of capital controls reduces the probability of future surges both at the aggregate and the asset flow levels.

Dataset: capital control changes across 40 advanced and emerging market and developing economies over 1995-2018.
Empirical approach: evaluation of the impact of tightening capital controls on the probability of subsequent inflow surges, including analysis by asset flow levels and by matching controls to targeted asset classes.
Robustness checks: results tested across various definitions of surges.

Tightening of capital controls reduces the probability of future inflow surges at the aggregate level.
Tightening of capital controls reduces the probability of future inflow surges at the asset flow level.
Results are robust to various definitions of surges.
Effects are stronger when controls are matched to the asset class they target.
Significant multilateral spillovers from capital control actions were found, indicating cross-border effects.

Capital controls can be effective tools to limit inflow surges when appropriately targeted to the relevant asset classes.
Given significant multilateral spillovers, coordination and international cooperation are important in the use of capital controls.
Policymakers should consider the match between the design of controls and the specific asset flows they aim to influence.