Capital Controls on Outflows: New Evidence and a Theoretical Framework

Capital Controls on Outflows: New Evidence and a Theoretical Framework
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Volume/Issue: Volume 2024 Issue 164
Publication date: July 2024
ISBN: 9798400283710
$20.00
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Topics covered in this book

This title contains information about the following subjects. Click on a subject if you would like to see other titles with the same subjects.

Exports and Imports , Capital Flows , Capital Controls , Coordination Failures , Reputation , Time Inconsistency , CCO policy , CCOS entail deadweight loss , CCO implementation , discretionary CCO Policy , costless capital , Capital outflows , Capital flow management , Institutional View on capital flows , Global

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.