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Mr. Akira Ariyoshi, Mr. Andrei A Kirilenko, Ms. Inci Ötker, Mr. Bernard J Laurens, Mr. Jorge I Canales Kriljenko, and Mr. Karl F Habermeier

T his paper aims to develop a deeper understanding of the role that capital controls may play in coping with volatile movements of capital, and of complex issues surrounding capital account liberalization. It provides a detailed analysis of specific country cases to shed light on the potential benefits or costs of capital controls, including those used in crisis situations. It also considers the important link between prudential policies and capital controls, including the improvement of prudential practices and accelerated financial sector reform to address

Andrés Fernández, Mr. Michael W Klein, Mr. Alessandro Rebucci, Mr. Martin Schindler, and Martin Uribe
This paper presents a new dataset of capital control restrictions on both inflows and outflows of 10 categories of assets for 100 countries over the period 1995 to 2013. Building on the data in Schindler (2009) and other datasets based on the analysis of the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), this dataset includes additional asset categories, more countries, and a longer time period. The paper discusses in detail the construction of the dataset and characterizes the data with respect to the prevalence and correlation of controls across asset categories and between controls on inflows and controls on outflows, the aggregation of the separate categories into broader indicators, and the comparison of this dataset with other indicators of capital controls.
Mr. Akira Ariyoshi, Mr. Andrei A Kirilenko, Ms. Inci Ötker, Mr. Bernard J Laurens, Mr. Jorge I Canales Kriljenko, and Mr. Karl F Habermeier

Abstract

This paper aims to develop a deeper understanding of the role that capital controls may play in coping with volatile movements of capital, and of complex issues surrounding capital account liberalization. It provides a detailed analysis of specific country cases to shed light on the potential benefits or costs of capital controls, including those used in crisis situations. It also considers the important link between prudential policies and capital controls, including the improvement of prudential practices and accelerated financial sector reform to address the risks involved in cross-border transactions. Chapter II reviews the experience of selected countries with the use or removal of capital controls based on a detailed review and comparison of the experience of a group of 14 countries that used various types of capital controls, often to manage episodes of unsustainable capital flows. Chapter III examines the prudential approach to managing the risks associated with capital flows, and Chapter IV provides some conclusions.

Ms. Eliane A. Cardoso and Mr. Ilan Goldfajn

Front Matter Page Research Department Authorized for distribution by Michael Mussa Contents Summary I. Introduction II. Capital Flows: Can Theory and Practice Justify Controls? A. Capital Flows and Consumption B. Capital Flows and Production C. Capital Flows and Macroeconomic Management D. The Costs of Capital Controls E. Does Practice Justify Controls? III. The Brazilian Experience: Determinants of Capital Flows and the Effect of Controls A. Capital Flows to Brazil B. Determinants of Capital Flows C. Capital Controls

Mr. Eswar S Prasad, Mr. Kenneth Rogoff, and Shang-Jin Wei

have reviewed thus far, a key theme emerges: many of the benefits of financial openness seem to be masked in cross-country analysis using macroeconomic data but are more apparent in disaggregated analyses using micro data. An approach based on micro data also has a better chance of disentangling causal effects and capturing the relative importance of different channels through which financial integration affects growth. Some economists have used micro data to estimate the costs of capital controls. Such controls seem to cause distortions in the behavior of firms

Mr. Eswar S Prasad, Mr. Kenneth Rogoff, and Shang-Jin Wei

importance of different channels through which financial integration affects growth. Some economists have used micro data to estimate the costs of capital controls. Such controls seem to cause distortions in the behavior of firms (and individuals), which adjust their behavior to evade capital controls. By insulating an economy from competitive forces, capital controls may also reduce market discipline. Thus, their existence appears to result in significant efficiency costs at the level of individual firms or sectors. Making sense of the evidence We now introduce

Eugenia Andreasen, Mr. Martin Schindler, and Mr. Patricio A Valenzuela

account restrictions on corporate credit ratings. This paper contributes to the literature on the costs of capital controls by exploring how they affect the credit spreads of bonds issued in international markets by advanced and emerging-market borrowers. Although most of the empirical research on capital controls focuses on stock markets, it is well documented that debt issues in public markets are a more important source of capital than equity issues for firms and that debt markets are more internationalized than equity markets ( Gozzi et al., 2010 ). Thus

Mr. Eswar S Prasad, Mr. Kenneth Rogoff, and Shang-Jin Wei

literature that we have summarized thus far suggests that only equity market liberalizations clearly boost short- and medium-term growth. The evidence that FDI increases growth is less conclusive although recent work has begun to come up with more positive evidence. There are two related strands of literature that help round out the picture. The first looks jointly at the effects of different flows in a common framework. The second analyzes the costs of capital controls—this constitutes another approach to examining the costs/benefits of financial integration. A number

Mr. Giovanni Dell'Ariccia, Mr. Paolo Mauro, Mr. Andre Faria, Mr. Jonathan David Ostry, Mr. Julian Di Giovanni, Mr. Martin Schindler, Mr. Ayhan Kose, and Mr. Marco Terrones

policies, and reduce the distortionary costs of capital controls, perhaps engendering a virtuous circle in which ultimately the country will meet the necessary conditions to reap the full benefits of integration. This section was prepared by Giovanni Dell'Ariccia, André Faria, Ayhan Kose, and Marco Terrones. 1 It should be noted that, for a number of the empirical associations examined in this section, causality may run in both directions. 2 This result is robust to estimation in a cross section of long-run averages, changes in country coverage

International Monetary Fund

during the Second World War, capital flows were overwhelmingly official in the immediate post-war period. Under Bretton Woods, capital controls were explicitly included to allow countries to peg their exchange rate while maintaining a degree of monetary autonomy, and thus private capital flows, though growing, remained small in relation to current and official transactions through to the 1970s. However, this solution to the classic monetary policy ‘trilemma’ was gradually abandoned in the economies at the core of the IMS as the microeconomic costs of capital controls