Effectiveness of Capital Controls in Selected Emerging Markets in the 2000's

Abstract

This paper estimates the effectiveness of capital controls in response to inflow surges in Brazil, Colombia, Korea, and Thailand in the 2000s. Controls are generally associated with a decrease in inflows and a lengthening of maturities, but the relationship is not statistically significant in all cases, and the effects are temporary. Controls are more successful in providing room for monetary policy than dampening currency appreciation pressures. We argue that the macroeconomic impact of capital controls depends on the extensiveness of the policy, the level of capital market development, the support provided by other policies, and the persistence of capital flows.

Exchange Rates and Portfolio Rebalancing: Evidence from Emerging Economies

“…Based on monthly data, the estimated coefficients are generally insignificant for countries with capital controls. Overall, these results are consistent with the literature that controlling capital flows are less successful in easing the upward pressure on exchange rates (Baba & Kokenyne, 2011, Magud et al, 2011, indicating that capital controls have a limited impact on the correlation between the exchange rate returns and excess emerging stock market returns regardless of geographical locations.…”

“…The effect of such actions on exchange rates remains an open question. While early studies suggest that capital controls and central bank interventions have short-term effects on exchange rates (Magud et al, 2011), recent research indicates that these actions are ineffective in changing the trend for emerging currencies (Binici et al, 2009;Rincon & Toro, 2010;Baba & Kokenyne, 2011;Concha & Galindo, 2011;Magud et al, 2011) (Note 2). Therefore, in contrast to developed economies, the correlation structure between exchange rates and excess emerging stock market returns is affected by several factors including the magnitude of net equity inflows to emerging economies, the impact of capital controls and central bank interventions on the foreign exchange markets, and the significance of portfolio rebalancing by international investors.…”

Beyond capital controls: Regulation of foreign currency derivatives markets in the Republic of Korea and Brazil after the global financial crisis

“…As Kim and Yong Yang (2010) point out, most capital flow restrictions were dismantled, and, as also occurred in Brazil, capital inflows and outflows became market determined. During the capital flow boom between 2003 and 2007, the Republic of Korea initiated a process of reserve accumulation and steadily relaxed outward investment controls to stem appreciation pressures; this resulted in the elimination of most controls by 2007 (Baba and Kokenyne, 2011).…”

“…Moreover, banks (mainly the local branches of foreign banks, which were only subject to risk management standards, not to liquidity ratios or other direct regulations applicable to Korean banks) engaged in interest rate arbitrage, borrowing dollars on a short-term basis, selling those dollars for won on the spot market, then buying certificates of deposit or other domestic bonds and selling the won forward for dollars. It was against this backdrop of strong capital inflows that authorities progressively liberalized capital outflows (Baba and Kokenyne, 2011;imf, 2011a).…”

Más allá de los controles de capital: Regulación de los mercados de derivados en moneda extranjera en la República de Corea y el Brasil después de la crisis financiera mundial

“…Como señalan Kim y Yong Yang (2010), se desmantelaron la mayoría de las restricciones sobre los ujos de capital y, como también sucedió en el Brasil, las entradas y salidas de capital pasaron a estar determinadas por el mercado. Durante el auge de los movimientos entre 2003 y 2007, en la República de Corea se inició un proceso de acumulación de reservas y los controles sobre la inversión en el exterior se fueron tornando progresivamente más exibles con el n de frenar las presiones a la apreciación; como resultado de ello, hacia 2007 se habían eliminado la mayoría de los controles (Baba y Kokenyne, 2011).…”