Minimum-stay requirements are a direct method of lengthening the maturity of liabilities. The insurmountable debt and subsequent financial crisis in Greece have led to heated debate amongst economists of the importance of capital flow and the need for its management. Such measures could be effective in reducing currency mismatches as well as in limiting debt inflows. We use high frequency data and a new econometric approach to evaluate the effectiveness of controls on capital inflows. Currency derivative markets-which have grown in depth and sophistication-played a key role in blunting the effectiveness of intervention. The main worry from the financial fragility perspective is that large capital inflows may lead to excessive foreign borrowing and foreign currency exposure, possibly fueling domestic credit booms especially foreign-exchangedenominated lending and asset bubbles with significant adverse effects in the case of a sudden reversal.
Atish R, Ghosh is Assistant Director in the Research Department of the International Monetary Fund. The results suggest that under Colombia's inflation targeting regime, which incorporates exchange rate flexibility and a highly responsive monetary policy, the economy is well poised to adjust to different external shocks. Selected Cases of Control Measures on Capital Inflows Country Year Controls Study Brazil Chile 1991—98 1993—98 2007—08 Croatia 2004—08 - Explicit tax on capital flows on stock market investments, foreign loans, and certain foreign exchange transactions. We create one dummy for each of the 4 months after the capital controls were introduced and one dummy for the remaining time the controls were in effect. More relevant for present purposes is the case of countries with substantially open capital accounts, which will need to design and implement new controls and likely strengthen them over time in the face of circumvention, without creating excessive distortions. The models are estimated using monthly data ranging from August of 1998 to May of 2008.
The author analyzes the risks of dismantling of the European Union posed by the current monetary policy, under which the single currency of the European Union not only retarded economic growth, but also led to economic contraction and high unemployment. Indeed, it is clear that controls did indeed reduce total capital inflows and have an effect on asset prices—all during a crisis where asset bubbles were among the core causes. Ghosh, Karl Habermeier, Marcos Chamon, Mahvash S. It distinguishes between interest-based, institutionalist, and ideas-based approaches located at different levels of analysis. He has been a leading force in the revitalisation and increased professional standing of heterodox economics research around the world. Annual Report on Exchange Arrangements and Exchange Restrictions.
Composition of inflows: Controls on inflows, however, may alter the maturity structure and composition of inflows. Intermediaries have also learned to circumvent capital controls through the creation of sophisticated derivative schemes. The evidence presented points towards a relative inability of the measures adopted to reduce the level of capital inflows. Finally, capital controls can be difficult and costly to enforce, even in countries with sound institutions and low levels of corruption. An obvious example is debt versus equity flows, where the latter allows for greater risk sharing between creditor and borrower. Trying to raise interest rates to offset that effect causes more capital inflows, as foreign investors rush in to take advantage of higher yields. The striking difference between the results of the two papers is that Concha and Galindo 2009 conclude that the controls decreased the volatility of the exchange rate, whereas Clements and Kamil 2009 find that the controls increased its volatility.
The difference between the two estimates, however, is not statistically significant. Since most studies do not find much impact of controls on aggregate volumes of inflows, they usually do not find much effect on exchange rate appreciation either. We recognize that changes in the controls will affect the way in which different macro variables relate to each other. Magud and Reinhart 2006 also address the issue of methodological heterogeneity by evaluating the methodological rigor of each of the studies. Second, as a 'liability policy' they help to avoid risky corporate balance-sheet structures excessive reliance on short-term external debts, maturity, and currency mismatches and thus the worst effects of the volatility of capital inflows.
The next question refers to the factors that determine the content of domestic informal institutions, such that they favor capital account openness in some countries, and are much more equivocal in others. The first panel contains 10 South American 11 countries and the second 11 East Asian countries for which data was available Japan was excluded. As Nigeria is seeking to open its doors to capital inflow, it is important for it to keep in mind the lessons of the Greek financial crisis. However, considering the small size of their economies compared to Latin America and Asia respectively, the endogeneity was likely small and would not affect the results. Although the results should not be taken as anything more than suggestive correlations, it does appear that such countries indeed fared better in the current crisis. On the other hand, one could conclude that more vigor and attention is needed in the design of particular controls, not just their justification.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. A strong enforcement capacity as, for example, in Chile, is therefore needed to identify loopholes and prevent circumvention. However, in both cases the controls were linked to exchange rate volatility and in Thailand asset prices recovered their upward trend the day after the announcement. My dissertation seeks to fill this analytical lacuna. Legal Restrictions and Asset Composition of International Financial Flows: International Monetary Fund. Clearly, the appropriate policy mix is likely to depend on the state of the economy i. In the face of substantial inflows, a purely macroeconomic policy response may not suffice in some country circumstances as described above , and controls on capital inflows may form a useful part of the policy toolkit.
You can help correct errors and omissions. Capital Market Liberalization and Development. Additional research is needed to assess the effects of capital controls on financial stability. Clements, Benedict, and Herman Kamil. As with Colombia, there were no lasting effects during the post-controls period.
In the run up to the financial crisis of 2007-2009 many developing nations fell victim to massive inflows of capital, capital that their financial systems found difficult to absorb. Like most developing countries, Colombia received large inflows of foreign capital between 2005 and 2007, with a particularly sharp increase in the first quarter of 2007 see figure 7 4. Having a flexible exchange rate greatly reduces the probability of experiencing a capital flow contraction. This method was used, for exemple, in Cardoso and Goldfajn 2007 , 3 This variable is very powerful in the sense that it captures the effect of any omitted variables that differ across countries and is relatively stable during the time period investigated. We also find that controls have significantly increased the volatility of the exchange rate. The Blue Chip Swap is one example of this type of operation. The domestic interest rates did not yield a significant change in the exchange rate, but the U.