Conditions for the success of capital controls: The elasticity approach

The Journal of Economic Asymmetries

2021

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The COVID-19 pandemic shock has harmed the US and East Asian stock markets. Focusing on measuring the inherent correlation, this paper employs a GARCH-Copula CoVaR approach to address the debate on the extreme risk spillovers from the US to China, Japan, Hong Kong, and South Korea stock returns. The results show a large spillover effect from the US to East Asian stock markets. Compared to the tranquil period, these spillovers become stronger in the COVID-19 period. The findings show that indirect spillovers on the Chinese stock market are heavier than direct spillovers, and impacts deluge only via Hong Kong. The study contrasts spillover’ features of the US COVID-19 shock and the Chinese 2015 crisis. These findings provide useful support for policymakers and risk managers involved in the East Asian stock markets.

Section: Discussionmentioning

confidence: 99%

Stock market comovements: Evidence from the COVID-19 pandemic

The Journal of Economic Asymmetries

2021

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“…Another relevant matter concerns the joint use of macroprudential policies and capital controls. With data available for more than a decade since the 2008 global financial crisis, a number of recent studies examined the efficiency of restrictive policies in retrospect through a panel data analysis (Frost et al, 2020;Nier et al, 2020;Zehri, 2022). Many countries, particularly emerging economies, have used capital controls as an effective tool against the surge of capital flows.…”

Section: Literature Reviewmentioning

confidence: 99%

The Volatility Lowering Effects of Capital Controls

Global Journal of Emerging Market Economies

2022

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The evidence that capital controls adversely affect cross-border trade is debatable. This study shows that capital controls may support international trade by mitigating the negative effect of macroeconomic volatility. We use quarterly data from a sample of 25 emerging countries over the period 2011–2019. Using long- and short-standing capital control dynamic panel models, and diversifying robust estimation techniques, our results show that capital controls alleviate the adverse effects of the exchange rate, interest rate differential, and inflation volatilities. The long-lasting capital controls (walls) are more effective than short-lasting capital controls (gates). Besides, the effects of these controls are asymmetric regarding the financial development level and category of flows. The study highlights the beneficial role of macroprudential policy in supporting capital control actions. The results of this study have two main policy implications, the effectiveness of “walls” controls and the importance of macroeconomic policy coordination.

“…Based on these findings, a well-coordinated restrictive policy (capital controls or macroprudential policy) may effectively protect against harmful IFS. Moreover, these findings call for harmonising policies to face adverse international shocks (Zehri, 2022).…”

mentioning

confidence: 99%

Foreign Assets Management and Capital Expenditure: Firm-Level Evidence from 45 Emerging Market Economies

2022

MJES

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This paper investigates the effects of foreign assets management (FAM), led by policymakers in emerging market economies, on companies’ capital expenditure with international financial shocks (IFS). Using company-level data from 45 emerging market economies from 2005 to 2020, we employed a multiplicative regression setup for Tobin’s Q ratio capital expenditure framework. First, our findings show that FAM positively affects capital expenditure; this impact is reinforced with stronger detrimental IFS. Second, the capacity to access foreign funding supports FAM policy, and more financially constrained companies are less responsive to FAM. Third, capital controls and macroprudential policies support FAM – they create a protective policy mix in the IFS context. The statistical significance of FAM’s impact on companies’ capital expenditure has an economic implication and is pertinent to the global economy. This study recommends coordinating macro-management policies to isolate companies’ capital expenditure from IFS effectively.