## Capital Controls on Outflows: New Evidence and a Theoretical Framework

_IMF Working Papers, July 26, 2024_

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**Canonical URL:** [Capital Controls on Outflows: New Evidence and a Theoretical Framework](https://www.imf.org/en/publications/wp/issues/2024/07/26/capital-controls-on-outflows-new-evidence-and-a-theoretical-framework-552509)

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## Bibliographic details
- Authors: Roberto Chang, Andrés Fernández, Humberto Martinez
- Published: July 26, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400283710.001

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### Executive summary
- Study focus: capital controls on outflows (CCOs) in situations of macroeconomic and financial distress.
- Main empirical finding: CCO implementation is associated with crises and declines in GDP growth.
- Theoretical contribution: a framework consistent with the empirical findings that yields policy and welfare lessons.
- Key mechanisms: costly coordination failures by foreign investors; CCOs can act as coordination devices.
- Trade-off: CCO benefits from avoiding coordination failures can make them optimal even if CCOs entail deadweight losses; if deadweight losses are large, CCOs are detrimental for welfare.
- Policy challenges: optimal CCOs can suffer from time inconsistency; political opportunism may limit CCO policy.
- Implication: government credibility and reputation building are critical for successful implementation of CCOs.

### Empirical findings
- CCO implementation is associated with:
  - crises.
  - declines in GDP growth.

### Theoretical framework and mechanisms
- Central theoretical ingredients:
  - Costly coordination failures by foreign investors.
  - Suitably tailored CCOs can sometimes avoid these coordination failures.
- Welfare trade-offs:
  - Benefits from CCOs as coordination devices versus deadweight losses caused by CCOs.
  - If deadweight losses are large, CCOs reduce welfare.
- Policy dynamics:
  - Optimal CCO policies can be time-inconsistent.
  - Political opportunism can constrain CCO policy implementation.

### Policy implications and recommendations
- Design CCOs to serve as coordination devices to mitigate costly investor coordination failures.
- Weigh directly the deadweight losses of CCOs against coordination benefits; avoid CCOs when deadweight losses are large.
- Strengthen government credibility and build reputation to mitigate time inconsistency and limit political opportunism that undermines CCO effectiveness.

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_Source: https://www.imf.org/en/publications/wp/issues/2024/07/26/capital-controls-on-outflows-new-evidence-and-a-theoretical-framework-552509_