This paper examines the effectiveness of capital outflow restrictions in a sample of 37 emerging market economies during the period 1995-2010, using a panel vector autoregression approach with interaction terms. Specifically, it examines whether a tightening of outflow restrictions helps reduce net capital outflows. We find that such tightening is effective if it is supported by strong macroeconomic fundamentals or good institutions, or if existing restrictions are already fairly comprehensive. When none of these three conditions is fulfilled, a tightening of restrictions fails to reduce net outflows as it provokes a sizeable decline in gross inflows, mainly driven by foreign investors.

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Sharp movements in commodity prices in recent years caused strong shifts in the terms of trade faced by small open economies. This renewed interest in a long-standing question: Can a flexible exchange rate insulate the domestic economy from the hardships associated with external shocks? This paper offers empirical evidence to address this question, which has remained heavily contested in both theoretical and empirical literatures. The short answer is yes.We study the impact of an exogenous fall in the terms of trade in a large sample of small open economies. Using a panel vector autoregression (PVAR) specification, we estimate the response of domestic variables including the exchange rate, output, exports, imports, and domestic demand. We allow the responses to vary according to a new de facto exchange rate regime classification scheme from Ilzetzki et al. (2019). We find strong evidence that flexible exchange rate regimes play a shockabsorbing role by reducing the response of output to terms-of-trade shocks.