Capital Controls on Outflows: New Evidence and a Theoretical Framework

By Roberto Chang, Andrés Fernández, Humberto Martinez

July 26, 2024

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Roberto Chang, Andrés Fernández, and Humberto Martinez. Capital Controls on Outflows: New Evidence and a Theoretical Framework, (USA: International Monetary Fund, 2024) accessed November 9, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We study capital controls on outflows (CCOs) in situations of macroeconomic and financial distress. We present novel empirical evidence indicating that CCO implementation is associated with crises and declines in GDP growth. We then develop a theoretical framework that is consistent with such empirical findings and also yields policy and welfare lessons. The theory features costly coordination failures by foreign investors which can sometimes be avoided by suitably tailored CCOs. The benefits of CCOs as coordination devices can make them optimal even if CCOs entail deadweight losses; if the latter are large, however, CCOs are detrimental for welfare. We show that optimal CCOs can suffer from time inconsistency, and also how political opportunism may limit CCO policy. Hence government credibility and reputation building emerge as critical for the successful implementation of CCOs.

Subject: Balance of payments, Capital controls, Capital flow management, Capital flows, Capital outflows, Institutional View on capital flows

Keywords: Capital Controls, Capital flow management, Capital Flows, Capital outflows, CCO implementation, CCO policy, CCOS entail deadweight loss, Coordination Failures, Costless capital, Discretionary CCO Policy, Global, Institutional View on capital flows, Reputation, Time Inconsistency

Publication Details

Pages:

83
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/164
Stock No:

WPIEA2024164
ISBN:

9798400283710
ISSN:

1018-5941

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