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Christian Saborowski, Sarah Sanya, Hans Weisfeld, and Juan Yepez
This paper examines the effectiveness of capital outflow restrictions in a sample of 37 emerging market economies during the period 1995-2010, using a panel vector autoregression approach with interaction terms. Specifically, it examines whether a tightening of outflow restrictions helps reduce net capital outflows. We find that such tightening is effective if it is supported by strong macroeconomic fundamentals or good institutions, or if existing restrictions are already fairly comprehensive. When none of these three conditions is fulfilled, a tightening of restrictions fails to reduce net outflows as it provokes a sizeable decline in gross inflows, mainly driven by foreign investors.
Age Bakker and Mr. Bryan Chapple

General Overview Restrictions on capital flows are normally imposed to limit downward or—less commonly—upward pressure on the exchange rate. 1 Capital controls seek to insulate the domestic economy from foreign disturbances and aim in particular at limiting large exchange rate movements caused by volatile capital flows. Restrictions on outflows have mainly been applied to short-term capital transactions to counter volatile speculative flows that threaten to undermine exchange rate stability and to deplete a country’s foreign exchange reserves (often

International Monetary Fund. Research Dept.

, Balance of Payments Statistics ; IMF, International Financial Statistics ; PRS Group, Inc., International Country Risk Guide ; and IMF staff calculations. Although capital flow restrictions and the fixing of the exchange rate may have helped avoid a more severe financial crisis in the short run ( Kaplan and Rodrik, 2002 ), the Malaysian authorities concluded that international financial integration remained crucial for the ultimate success of the country. They therefore embarked on a staged process of reforms that involved both strengthening the domestic financial

Mr. Eugenio M Cerutti and Haonan Zhou

flows: Overall macroprudential policy Figure 3: Model prediction and counterfactual banking flows: Overall capital flow restrictions Figure 4: Interaction between macroprudential policy, capital control and direct cross-border banking Tables Table 1: Variable Definitions Table 2: Summary Statistics Table 3: Macroprudential policy, capital control and cross-border lending – first stage overall estimates Table 4: Macroprudential policy, capital control and cross-border lending – second stage overall estimates Table 5: Macroprudential policy and cross

Christian Saborowski, Sarah Sanya, Hans Weisfeld, and Juan Yepez