Capital Controls: Theory and Evidence
Journal of Economic Literature
vol. 59,
no. 1, March 2021
(pp. 45-89)
Abstract
This paper synthesizes recent advances in the theoretical and empirical literature on capital controls. We start by observing that international capital flows have both benefits and costs, but some of these are not internalized by individual actors and thus constitute externalities. The theoretical literature has identified pecuniary externalities and aggregate demand externalities that respectively contribute to financial instability and recessions. These externalities provide a natural rationale for countercyclical capital controls that lean against boom and bust cycles in international capital flows. The empirical literature has developed several measures of capital controls to capture different aspects of capital account openness. We evaluate the strengths and weaknesses of different measures and provide an overview of the empirical findings on the effectiveness of capital controls in addressing the externalities identified by the theory literature, that is, in reducing financial fragility and enhancing macroeconomic stability. We also discuss strategies to deal with the endogeneity of capital controls in such statistical exercises. We conclude by providing an overview of the historical and current debates on the role of capital controls in macroeconomic management and their relationship to the academic literature.Citation
Erten, Bilge, Anton Korinek, and José Antonio Ocampo. 2021. "Capital Controls: Theory and Evidence." Journal of Economic Literature, 59 (1): 45-89. DOI: 10.1257/jel.20191457Additional Materials
JEL Classification
- D62 Externalities
- F32 Current Account Adjustment; Short-term Capital Movements
- F33 International Monetary Arrangements and Institutions
- F38 International Financial Policy: Financial Transactions Tax; Capital Controls
- F44 International Business Cycles