Capital Controls on Outflows: New Evidence and a Theoretical Framework
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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.
Series:
Working Paper No. 2024/164
Subject:
Balance of payments Banking crises Capital controls Capital flow management Capital flows Capital outflows Financial crises Institutional View on capital flows
Frequency:
regular
English
Publication Date:
July 26, 2024
ISBN/ISSN:
9798400283710/1018-5941
Stock No:
WPIEA2024164
Format:
Paper
Pages:
83
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