Effects of Capital Control Actions on Cross-Border Trade
DOI:
https://doi.org/10.47743/saeb-2022-0008Keywords:
capital controls, flows, volatility, trade.Abstract
The evidence that capital controls adversely affect cross-border trade is debatable. This study proves that capital controls may support international trade by mitigating the negative effect of macroeconomic volatility. We use quarterly data from a sample of 25 emerging countries over the period 2011-2019. Using long- and short-standing capital controls dynamic panel models, and diversifying robust estimations techniques, our results show that capital controls alleviate the adverse effect of the exchange rate, interest rate differential, and inflation volatilities. The long-lasting capital controls «walls» are more effective than short-lasting capital control «gates». Besides, the effects of these controls are asymmetric regarding the financial development level and category of flows for which are applied, inflows or outflows. The study highlights the beneficial role of the macroprudential policy in supporting capital control actions. The results of this study have two main policy implications, the effectiveness of ‘walls’ controls and the importance of macroeconomic policy coordination.
References
Ahnert, T., Forbes, K., Friedrich, C., & Reinhardt, D. (2021). Macroprudential FX regulations: Shifting the snowbanks of FX vulnerability? Journal of Financial Economics, 140(1), 145-174. http://dx.doi.org/10.1016/j.jfineco.2020.10.005
Aizenman, J., & Lee, J. (2007). International reserves: Precautionary versus mercantilist views, theory and evidence. Open Economies Review, 18(2), 191-214. http://dx.doi.org/10.1007/s11079-007-9030-z
Alam, Z., Alter, M. A., Eiseman, J., Gelos, M. R., Kang, M. H., Narita, M. M., & Wang, N. (2019). Digging deeper—Evidence on the effects of macroprudential policies from a new database. Retrieved from https://www.imf.org/en/Publications/WP/Issues/2019/03/22/Digging-Deeper-Evidence-on-the-Effects-of-Macroprudential-Policies-from-a-New-Database-46658
Alfaro, L., Cunat, A., Fadinger, H., & Liu, Y. (2018). The real exchange rate, innovation and productivity: heterogeneity, asymmetries and hysteresis. Retrieved from https://www.nber.org/papers/w24633 http://dx.doi.org/10.3386/w24633
Amiti, M., & Wakelin, K. (2003). Investment liberalization and international trade. Journal of International Economics, 61(1), 101-126. http://dx.doi.org/10.1016/S0022-1996(02)00079-X
Annelies, V. C., Mark, V., Roel, B., & Sigrid, V. (2020). The degree of international trade and exchange rate exposure—Firm‐level evidence from two small open economies. International Journal of Finance & Economics, 1-19. http://dx.doi.org/10.1002/ijfe.2189
Asteriou, D., Masatci, K., & Pılbeam, K. (2016). Exchange rate volatility and international trade: International evidence from the MINT countries. Economic Modelling, 58, 133-140. http://dx.doi.org/10.1016/j.econmod.2016.05.006
Bacchetta, P., Davenport, M., & van Wincoop, E. (2021). Can Sticky Portfolios Explain International Capital Flows and Asset Prices? Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3976990 http://dx.doi.org/10.2139/ssrn.3976990
Batini, N., & Durand, L. (2020). Analysis and Advice on Capital Account Developments: Flows, Restrictions, and Policy Toolkits. Retrieved from https://ieo.imf.org/~/media/IEO/Files/evaluations/completed/09-30-2020-imf-advice-on-capital-flows/cfm-bp03-analysis-and-advice-on-capital-account-developments-flows-restrictions-and-policy-toolki.ashx?la=en
Beck, T. (2002). Financial development and international trade: Is there a link? Journal of International Economics, 57(1), 107-131. http://dx.doi.org/10.1016/S0022-1996(01)00131-3
Benigno, G., Converse, N., & Fornaro, L. (2015). International capital flows, sectoral resource allocation, and the financial resource curse. Centre for Economic Performance Discussion Paper No. 1348. Retrieved from https://cep.lse.ac.uk/_NEW/NEWS/abstract.asp?index=5410
Bergant, K., Grigoli, M. F., Hansen, M. N. J. H., & Sandri, M. D. (2020). Dampening global financial shocks: can macroprudential regulation help (more than capital controls)? Retrieved from https://www.imf.org/en/Publications/WP/Issues/2020/06/26/Dampening-Global-Financial-Shocks-Can-Macroprudential-Regulation-Help-More-than-Capital-49516 http://dx.doi.org/10.5089/9781513547763.001
Bhattarai, K., Mallick, S. K., & Yang, B. (2021). Are global spillovers complementary or competitive? Need for international policy coordination. Journal of International Money and Finance, 110, 102291. http://dx.doi.org/10.1016/j.jimonfin.2020.102291
Bianchi, F., Melosi, L., & Rottner, M. (2019). Hitting the elusive inflation target Retrieved from https://www.nber.org/papers/w26279 http://dx.doi.org/10.3386/w26279
Bianchi, J. (2011). Overborrowing and systemic externalities in the business cycle. The American Economic Review, 101(7), 3400-3426. http://dx.doi.org/10.1257/aer.101.7.3400
Binici, M., & Das, M. (2021). Recalibration of capital controls: Evidence from the IMF taxonomy. Journal of International Money and Finance, 110, 102252. http://dx.doi.org/10.1016/j.jimonfin.2020.102252
Binici, M., Hutchison, M., & Schindler, M. (2010). Controlling capital? Legal restrictions and the asset composition of international financial flows. Journal of International Money and Finance, 29(4), 666-684. http://dx.doi.org/10.1016/j.jimonfin.2010.01.001
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143. http://dx.doi.org/10.1016/S0304-4076(98)00009-8
Bush, G. (2019). Financial development and the effects of capital controls. Open Economies Review, 30(3), 559-592. http://dx.doi.org/10.1007/s11079-018-09521-7
Cerdeiro, D. A., & Komaromi, A. (2019). Financial Openness and Capital Inflows to Emerging Markets: In Search of Robust Evidence2019(194). Retrieved from http://dx.doi.org/10.5089/9781513509839.001
Cerutti, E., Claessens, S., & Laeven, L. (2017). The use and effectiveness of macroprudential policies: New evidence. Journal of Financial Stability, 28, 203-224. http://dx.doi.org/10.1016/j.jfs.2015.10.004
Chakraborty, I. (2006). Capital inflows during the post-liberalisation period. Economic and Political Weekly, 143-150.
Chinn, M. D., & Ito, H. (2008). A new measure of financial openness. Journal of Comparative Policy Analysis, 10(3), 309-322. http://dx.doi.org/10.1080/13876980802231123
Chor, D., & Manova, K. (2012). Off the cliff and back? Credit conditions and international trade during the global financial crisis. Journal of International Economics, 87(1), 117-133. http://dx.doi.org/10.1016/j.jinteco.2011.04.001
Claessens, S., Ghosh, S. R., & Mihet, R. (2013). Macro-prudential policies to mitigate financial system vulnerabilities. Journal of International Money and Finance, 39, 153-185. http://dx.doi.org/10.1016/j.jimonfin.2013.06.023
Cravino, J., Lan, T., & Levchenko, A. A. (2020). Price stickiness along the income distribution and the effects of monetary policy. Journal of Monetary Economics, 110, 19-32. http://dx.doi.org/10.1016/j.jmoneco.2018.12.001
Cushman, D. O. (1983). The effects of real exchange rate risk on international trade. Journal of International Economics, 15(1-2), 45-63. http://dx.doi.org/10.1016/0022-1996(83)90041-7
Davis, J. S., & Van Wincoop, E. (2018). Globalization and the increasing correlation between capital inflows and outflows. Journal of Monetary Economics, 100, 83-100. http://dx.doi.org/10.1016/j.jmoneco.2018.07.009
De Gregorio, J., Edwards, S., & Valdés, R. O. (2000). Controls on capital inflows: Do they work? Journal of Development Economics, 63(1), 59-83. http://dx.doi.org/10.1016/S0304-3878(00)00100-0
Edwards, S. (1999). How effective are capital controls? The Journal of Economic Perspectives, 13(4), 65-84. http://dx.doi.org/10.1257/jep.13.4.65
Edwards, S. (2007). Introduction to "Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences". In S. Edwards (Ed.), Capital Controls and Capital Flows in Emerging Economies: Policies, Practices, and Consequences (pp. 1-18): University of Chicago Press.
Eichengreen, B., Gullapalli, R., & Panizza, U. (2011). Capital account liberalization, financial development and industry growth: A synthetic view. Journal of International Money and Finance, 30(6), 1090-1106. http://dx.doi.org/10.1016/j.jimonfin.2011.06.007
Eichengreen, B., & Rose, A. (2014). Capital controls in the 21st century. Journal of International Money and Finance, 48, 1-16. http://dx.doi.org/10.1016/j.jimonfin.2014.08.001
Erten, B., Korinek, A., & Ocampo, J. A. (2021). Capital controls: Theory and evidence. Journal of Economic Literature, 59(1), 45-89. http://dx.doi.org/10.1257/jel.20191457
Fernández, A., Klein, M. W., Rebucci, A., Schindler, M., & Uribe, M. (2016). Capital control measures: A new dataset. IMF Economic Review, 64(3), 548-574. http://dx.doi.org/10.1057/imfer.2016.11
Forbes, K. J. (2007). One cost of the Chilean capital controls: Increased financial constraints for smaller traded firms. Journal of International Economics, 71(2), 294-323. http://dx.doi.org/10.1016/j.jinteco.2006.03.005
Forbes, K. J., Fratzscher, M., & Straub, R. (2013). Capital Controls and Macroprudential Measures: What Are They Good For? MIT Sloan Research Paper No. 5061-13. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2364486
Forbes, K. J., Fratzscher, M., & Straub, R. (2015). Capital-flow management measures: What are they good for? . Journal of International Economics, 96, S76-S97. http://dx.doi.org/10.1016/j.jinteco.2014.11.004
Frankel, J. A., & Okongwu, C. (1996). Liberalized portfolio capital inflows in emerging markets: Sterilization, expectations, and the incompleteness of interest rate convergence. International Journal of Finance & Economics, 1(1), 1-23. http://dx.doi.org/10.1002/(SICI)1099-1158(199601)1:13.0.CO;2-K
Frost, J., Ito, H., & van Stralen, R. (2020). The effectiveness of macroprudential policies and capital controls against volatile capital inflows. BIS Working Papers No 867. Retrieved from https://www.bis.org/publ/work867.htm
Galati, G., & Moessner, R. (2018). What do we know about the effects of macroprudential policy? Economica, 85(340), 735-770. http://dx.doi.org/10.1111/ecca.12229
Giovannini, A., & Park, J. W. (1989). Capital Controls and International Trade Finance. Retrieved from https://www.nber.org/papers/w3112 http://dx.doi.org/10.3386/W3112
Glick, R., Guo, X., & Hutchison, M. (2006). Currency crises, capital-account liberalization, and selection bias. The Review of Economics and Statistics, 88(4), 698-714. http://dx.doi.org/10.1162/rest.88.4.698
Gong, L., Wang, C., & Zou, H. F. (2017). Optimal exchange-rate policy in a model of local-currency pricing with vertical production and trade. Open Economies Review, 28(1), 125-147. http://dx.doi.org/10.1007/s11079-016-9415-y
Grilli, V., & Milesi-Ferretti, G. M. (1995). Economic effects and structural determinants of capital controls. Staff Papers - International Monetary Fund. International Monetary Fund, 42(3), 517-551. http://dx.doi.org/10.2307/3867531
Gruben, W. C., & McLeod, D. (2002). Capital account liberalization and inflation. Economics Letters, 77(2), 221-225. http://dx.doi.org/10.1016/S0165-1765(02)00137-4
Guzman, M., Ocampo, J. A., & Stiglitz, J. E. (2018). Real exchange rate policies for economic development. World Development, 110, 51-62. http://dx.doi.org/10.1016/j.worlddev.2018.05.017
Hooper, P., & Kohlhagen, S. W. (1978). The effect of exchange rate uncertainty on the prices and volume of international trade. Journal of International Economics, 8(4), 483-511. http://dx.doi.org/10.1016/0022-1996(87)90001-8
Hsiao, C., Pesaran, M. H., & Tahmiscioglu, A. K. (2002). Maximum likelihood estimation of fixed effects dynamic panel data models covering short time periods. Journal of Econometrics, 109(1), 107-150. http://dx.doi.org/10.1016/S0304-4076(01)00143-9
Klein, L. R., Mariano, R. S., & Özmucur, S. (2006). Capital controls, financial crises and cures: simulations with an econometric model for Malaysia. In L. R. Klein & T. Shabbir (Eds.), Recent Financial Crises: Analysis, Challenges and Implications (pp. 134-147 ): Edward Elgar Publishing Ltd.
Klein, M. W. (2012). Capital controls: Gates versus walls. Retrieved from https://www.nber.org/papers/w18526 http://dx.doi.org/10.3386/w18526
Kose, M. A., Prasad, E. S., & Terrones, M. E. (2003). Financial integration and macroeconomic volatility. International Monetary Fund Working Paper No. 03/50 50(1), 119-142. Retrieved from https://www.imf.org/en/Publications/WP/Issues/2016/12/30/Financial-Integration-and-Macroeconomic-Volatility-16322
Lai, K., Wang, T., & Xu, D. (2021). Capital controls and international trade: An industry financial vulnerability perspective. Journal of International Money and Finance, 116, 102399. http://dx.doi.org/10.1016/j.jimonfin.2021.102399
Lane, P. R., & Milesi-Ferretti, G. M. (2008). The Drivers of Financial Globalization. American Economic Review, 98(2), 327-332.
Magud, N. E., Reinhart, C. M., & Rogoff, K. S. (2011). Capital controls: myth and reality-a portfolio balance approach. Retrieved from http://dx.doi.org/10.3386/w16805
Manova, K. (2013). Credit constraints, heterogeneous firms, and international trade. The Review of Economic Studies, 80(2), 711-744. http://dx.doi.org/10.1093/restud/rds036
McKenzie, M. D. (1999). The impact of exchange rate volatility on international trade flows. Journal of Economic Surveys, 13(1), 71-106. http://dx.doi.org/10.1111/1467-6419.00075
McKinnon, R. I., & Mathieson, D. J. (1981). How to Manage a Repressed Economy. Essays in International Finance No. 145. Retrieved from https://ies.princeton.edu/pdf/E145.pdf
Meese, R. A. (1984). Is the sticky price assumption reasonable for exchange rate models? Journal of International Money and Finance, 3(2), 131-139. http://dx.doi.org/10.1016/0261-5606(84)90001-9
Nier, E. W., Olafsson, T. T., Rollinson, Y. G., & Gelos, G. (2020). Exchange Rates and Domestic Credit-Can Macroprudential Policy Reduce the Link? International Monetary Fund Working Paper No. 20/187 Retrieved from https://www.imf.org/en/Publications/WP/Issues/2020/09/11/Exchange-Rates-and-Domestic-Credit-Can-Macroprudential-Policy-Reduce-the-Link-49725 http://dx.doi.org/10.5089/9781513556550.001
Obstfeld, M., & Rogoff, K. (1995). Exchange rate dynamics redux. Journal of Political Economy, 103(3), 624-660. http://dx.doi.org/10.1086/261997
Obstfeld, M., Shambaugh, J. C., & Taylor, A. M. (2008). Financial Stability, the Trilemma, and International Reserves. National Bureau of Economic Research Working Paper 14217 Retrieved from http://dx.doi.org/10.3386/w14217
Pandey, R., Pasricha, G. K., Patnaik, I., & Shah, A. (2021). Motivations for capital controls and their effectiveness. International Journal of Finance & Economics, 26(1), 391-415. http://dx.doi.org/10.1002/ijfe.1795
Pasricha, G. K. (2021). Estimated policy rules for capital controls. Journal of International Money and Finance, 102593. http://dx.doi.org/10.1016/j.jimonfin.2021.102593
Pina, G. (2015). The recent growth of international reserves in developing economies: A monetary perspective. Journal of International Money and Finance, 58, 172-190. http://dx.doi.org/10.1016/j.jimonfin.2015.08.009
Quinn, D., Schindler, M., & Toyoda, A. M. (2011). Assessing measures of financial openness and integration. IMF Economic Review, 59(3), 488-522. http://dx.doi.org/10.1057/imfer.2011.18
Qureshi, M. S., Ostry, J. D., Ghosh, A. R., & Chamon, M. (2011). Managing Capital Inflows: The Role of Capital Controls and Prudential Policies. NBER Working Paper No. 17363. Retrieved from https://www.nber.org/papers/w17363
Rajan, R., & Zingales, L. (1998). Financial development and growth. American Economic Review, 88(3), 559-586.
Rodrik, D. (1998). Why do more open economies have bigger governments? Journal of Political Economy, 106(5), 997-1032. http://dx.doi.org/10.1086/250038
Romer, D. (1993). Openness and inflation: Theory and evidence. The Quarterly Journal of Economics, 108(4), 869-903. http://dx.doi.org/10.2307/2118453
Soto, C. (1997). Controles a los Movimientos de Capitales: Evaluación Empírica del Caso Chileno. Retrieved from
Steinbach, S. (2021). Exchange Rate Volatility and Global Food Supply Chains. Retrieved from http://www.nber.org/papers/w29164
Stockman, A. C. (1985). Effects of inflation on the pattern of international trade. Canadian Journal of Economics, 18, 587-601. http://dx.doi.org/10.2307/135021
Svirydzenka, K. (2016). Introducing a new broad-based index of financial development. Retrieved from
Tamirisa, N. T. (1999). Exchange and Capital Controls as Barriers to Trade46(1). Retrieved from https://www.elibrary.imf.org/view/journals/024/1999/003/article-A004-en.xml http://dx.doi.org/10.5089/9781451974553.024
Wei, S. J., & Zhang, Z. (2007). Collateral damage: Exchange controls and international trade. Journal of International Money and Finance, 26(5), 841-863. http://dx.doi.org/10.1016/j.jimonfin.2007.04.006
Zehri, C. (2022). Conditions for the success of capital controls: The elasticity approach. International Journal of Finance & Economics, 27(1), 893-910. http://dx.doi.org/10.1002/ijfe.2182
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2022 Chokri Zehri
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
All accepted papers are published on an Open Access basis.
The Open Access License is based on the Creative Commons license.
The non-commercial use of the article will be governed by the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License as currently displayed on https://creativecommons.org/licenses/by-nc-nd/4.0
Under the Creative Commons Attribution-NonCommercial-NoDerivatives license, the author(s) and users are free to share (copy, distribute and transmit the contribution) under the following conditions:
1. they must attribute the contribution in the manner specified by the author or licensor,
2. they may not use this contribution for commercial purposes,
3. they may not alter, transform, or build upon this work.
This work is licenced under a 
