Are Capital Controls Prudential? An Empirical Investigation

Andrés Fernández, Alessandro Rebucci, Martín Uribe

NBER Working Paper No. 19671
Issued in November 2013
NBER Program(s):   EFG   IFM

A growing recent theoretical literature advocates the use of prudential capital control policy, that is, the tightening of restrictions on cross-border capital flows during booms and the relaxation thereof during recessions. We examine the behavior of capital controls in a large number of countries over the period 1995-2011. We find that capital controls are remarkably acyclical. Boom-bust episodes in output, the current account, or the real exchange rate are associated with virtually no movements in capital controls. These results are robust to decomposing boom-bust episodes along a number of dimensions, including the level of development, the level of external indebtedness, or the exchange-rate regime. We also document a near complete acyclicality of capital controls during the Great Contraction of 2007-2009.

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Document Object Identifier (DOI): 10.3386/w19671

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