Capital Controls: Theory and Evidence
José Antonio Ocampo
Journal of Economic Literature
no. 1, March 2021
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.
Erten, Bilge, Anton Korinek, and José Antonio Ocampo.
"Capital Controls: Theory and Evidence."
Journal of Economic Literature,
Current Account Adjustment; Short-term Capital Movements
International Monetary Arrangements and Institutions
International Financial Policy: Financial Transactions Tax; Capital Controls
International Business Cycles