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Paper to be pubished in the Journal of Economic Literature

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Bilge Erten’s paper, “Capital Controls: Theory and Evidence,” (with Anton Korinek and Jose Antonio Ocampo) has been accepted to the Journal of Economic Literature.

Abstract

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 theory literature has identifed pecuniary externalities and aggregate demand externalities that respectively contribute to financial instability and recessions. These externalities provide a natural rationale for counter-cyclical capital controls that lean against boom and busts 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 reducing financial fragility and enhancing macroeconomic stability, while discussing 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.

Link to paper

 

Published On: September 23, 2019