Effectiveness of Capital Outflow Restrictions

Abstract

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.

Between crises and sanctions: economic policy of the Russian Federation

“…Similar conclusions are presented in IMF research. Saborowski, Weisfeld, and Yepez (2014) have shown that restrictions on the movement of capital can be effective if at least one of the following three conditions is present: strong macroeconomic fundamentals; a developed institutional environment; and the existence of an effective system of control over an extended period of time. 4.…”

Domestic and multilateral effects of capital controls in emerging markets

“…5 Existing tests of the trilemma are based on testing whether the indices of (levels) of capital controls, monetary policy autonomy and exchange rate stability add to a constant (Aizenman, Chinn and Ito, 2010) or whether nominal interest rates in a country respond more to foreign interest rates in countries with more open capital accounts and less flexible exchange rates (Obstfeld, Shambaugh and Taylor, 2005) or testing comovements of asset prices with the global financial cycle (Rey, 2015). 6 Saborowski et al (2014) use panel VARs to assess the effectiveness of capital outflow restrictions in EMEs. Studies using country-specific VARs include Cardoso and Goldfajn (1998), De Gregorio et al (2000) and Baba and Kokenyne (2011).…”

The Jingshan Report: Opening China’s Financial Sector

“…Finally, the effective management of cross-border capital outflows requires certain conditions. The IMF proposes three key conditions: strong macroeconomic fundamentals, effective institutions and existing comprehensive restrictions (Saborowski, Sanya, Weisfeld & Yepez, 2014). Capital outflow restriction will be effective if at least one of these three conditions is met.…”