Capital Flow Management Policies: A Panel Data Analysis For Developing Countries

Abstract

The Global Financial Crisis has signaled that the growing magnitude and volatility in financial flows increasingly complicates ensuring macroeconomic and financial stability in developing countries. With the renewed attention on a better understanding of which appropriate policy tools help policymakers to provide stability, the recent literature has started to advocate the use of capital flow management policies, in particular, capital controls. Given these recent developments in the literature and the policy environment, this thesis seeks to answer two questions: (i) what are the impacts of capital controls on the size and volatility of gross inflows and outflows, and (ii) does the level of a country’s financial development affect the efficacy of capital controls? Based on a new dataset for capital controls developed by Fernandez et al. (2016) for a sample of 44 developing countries over the period 1998-2017, this study builds its empirical analysis on linear and nonlinear panel estimation procedures. The results show that the impact of capital controls differs across the volume of gross inflows and outflows suggesting increases in restrictions on outflows significantly reduce the volume of gross outflows. But there is no significant impact of capital controls on the gross inflows. Also, capital controls seem not to influence the volatility of gross inflows and outflows. Considering the panel threshold regressions, the results indicate that once a country surpasses a certain financial development threshold, higher levels of capital controls on inflows lead to lower gross inflow while there is no significant threshold for the size of gross outflows and volatility of the gross flows.