Bilge Erten’s paper, “Capital Controls: Theory and Evidence,” (with Anton Korinek and Jose Antonio Ocampo) has been published in the Journal of Economic Literature.
This paper synthesizes recent advances in the theoretical and empirical literature on capital controls. We start by observing that international capital flows have both benefits and costs, but some of these are not internalized by individual actors and thus constitute externalities. The theoretical literature has identified pecuniary externalities and aggregate demand externalities that respectively contribute to financial instability and recessions. These externalities provide a natural rationale for countercyclical capital controls that lean against boom and bust cycles in international capital flows. The empirical literature has developed several measures of capital controls to capture different aspects of capital account openness. We evaluate the strengths and weaknesses of different measures and provide an overview of the empirical findings on the effectiveness of capital controls in addressing the externalities identified by the theory literature, that is, in reducing financial fragility and enhancing macroeconomic stability. We also discuss strategies to deal with the endogeneity of capital controls in such statistical exercises. We conclude by providing an overview of the historical and current debates on the role of capital controls in macroeconomic management and their relationship to the academic literature.
Associate Professor of Economics and International Affairs
Bilge Erten is an Associate Professor of Economics and International Affairs and a Faculty Scholar at the Institute for Health Equity and Social Justice Research at Northeastern University. She is a Visiting Associate Professor at the Institute for E…