THE NEW INSTITUTIONAL FEATURE: AN ANALYSIS OF THE EFFECT OF DE JURE CAPITAL ACCOUNT RESTRICTIONS ON EXTREME CAPITAL FLOW EPISODES

Abstract

This paper extends recent work done on extreme episodes of gross international capital flows with a particular focus on the role of de jure controls on specific capital account transactions in light of their persistent nature when implemented in practice. This approach differs from much of the preceding literature that has examined how each country’s capital account openness in general determines cross-border capital flow into and out of its economy. Using data on the occurrence of extreme waves of capital flows in over 50 countries from 1996 to 2009 and 13 capital account restrictions recorded by the IMF’s AREAER on a country-by-country basis, evidence is found that controls on derivatives and other instruments, controls on guarantees, sureties, and financial backup facilities, and controls on personal capital transactions have consistent negative associations with the occurrence of extreme episodes. Some of this evidence is substantiated by a robustness check with alternatively defined restrictions to the capital account. These results may be informative for policymaking amidst an ongoing debate of whether capital controls can be an effective form of macroprudential policy.