TY - JOUR
AU - Edwards, Sebastian
TI - Capital Controls, Capital Flow Contractions, and Macroeconomic Vulnerability
JF - National Bureau of Economic Research Working Paper Series
VL - No. 12852
PY - 2007
Y2 - January 2007
DO - 10.3386/w12852
UR - http://www.nber.org/papers/w12852
L1 - http://www.nber.org/papers/w12852.pdf
N1 - Author contact info:
Sebastian Edwards
UCLA Anderson Graduate School of Management
110 Westwood Plaza, Suite C508
Box 951481
Los Angeles, CA 90095-1481
Tel: 310/206-6797
Fax: 310/206-5825
E-Mail: sebastian.edwards@anderson.ucla.edu
AB - In this paper I analyze whether restrictions to capital mobility reduce vulnerability to external shocks. More specifically, I ask if countries that restrict the free flow of international capital have a lower probability of experiencing a large contraction in net capital flows. I use three new indexes on the degree of international financial integration and a large multi-country data set for 1970-2004 to estimate a series of random-effect probit equations. I find that the marginal effect of higher capital mobility on the probability of a capital flow contraction is positive and statistically significant, but very small. Having a flexible exchange rate greatly reduces the probability of experiencing a capital flow contraction. The benefits of flexible rates increase as the degree of capital mobility increases. A higher current account deficit increases the probability of a capital flow contraction, while a higher ratio of FDI to GDP reduces that probability.
ER -