Dynamics of capital controls: panel evidence from Asia
ISSN: 0144-3585
Article publication date: 13 March 2020
Issue publication date: 6 April 2020
Abstract
Purpose
This study empirically examines the effect of capital controls on the volume and composition of capital flows at aggregated as well as at disaggregated level by different asset classes such as debt, FDI, equity, and derivatives.
Design/methodology/approach
Several dynamic panel SYS-GMM models are employed on two sets of unique data on cross-border capital flows and capital control index along with control variables at aggregated and disaggregated level by different asset classes during 1995–2015 for a sample of 31 Asian economies.
Findings
Econometric findings suggest that higher capital controls effectively reduce gross capital flows. The reduction in gross capital flows is largely found to be on account of effectiveness of controls on equity flows. However, the impact of controls on overall debt and derivative flows is found to be insignificant. Further, it was found that an increase in direct capital controls disaggregated by inflow and outflow categories significantly reduced the inflow of debt and equity + FDI flows and outflow of equity + FDI and derivative flows. Finally, the study did not find any substitution effect (due to indirect controls) and net effect on capital flows.
Practical implications
Results of such empirical examination may enable governments in respective countries to pursue prudent and rational capital controls as a shield against capital flight and shock transmission.
Social implications
Preventing capital flight through effective controls has macroeconomic benefits such as maintaining stability in income, growth, interest rate, exchange rate, and employment levels for the society.
Originality/value
The primary contribution of the study is the analysis of effectiveness of capital controls disaggregated by different asset categories such as debt, equity, FDI, and derivatives using two unique recent data sets for a large sample of Asian economies.
Keywords
Citation
Guru, B.K. and Yadav, I.S. (2020), "Dynamics of capital controls: panel evidence from Asia", Journal of Economic Studies, Vol. 47 No. 2, pp. 242-263. https://doi.org/10.1108/JES-08-2018-0302
Publisher
:Emerald Publishing Limited
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