Capital Flows, Financial Markets and Banking Crises by Chang Chia-Ying;

Author:Chang, Chia-Ying;
Language: eng
Format: epub, pdf
Publisher: Taylor & Francis (CAM)
Published: 2017-03-27T16:00:00+00:00

On macroeconomic outcome

Through managing capital flows, increasing financial stability and gaining monetary and other policy autonomies, capital controls could produce a more promising future macroeconomic outcome [Aguirre Carmona (2014)], especially for the recipient countries [Ramos-Tallada (2013)]. As a result, fluctuations are reduced [Mishkin (2001)], more output is produced [Hsu (2005)] and economic growth is greater [Mishkin (2001)] and faster [Costinot et al (2014)]. Because of capital controls, the decrease in fluctuation and volatility is not limited to the exchange rates but also to the macroeconomic variables, such as consumption, investment and employment [Chen and Chang (2015)]. The reduction in fluctuations would then stabilize the macro economy [Korinek (2011), Liu and Spiegel (2015)]. Moreover, it has been shown that how capital controls could produce better macroeconomic outcomes is through reducing global risks carried by capital inflow bonanzas and their cumulative impacts on the economy [Molnar et al (2013)]. The reduction in global risks would then decrease both the overseas spillover effects [Buss (2013)] and the impacts of external shocks [Chang, Liu, and Spiegel (2015), Forssbaeck and Oxelheim (2006), Han and Wei (2014), Ibrahim (2006)].

However, there are also studies finding that capital controls do not have positive effects on macroeconomic outcomes. For example, Darku (2010) finds that capital controls would limit the use of international financial markets to smooth consumption. Duasa and Mosley (2006) find that capital controls do not affect economic productivity and GDP across a sample of 30 developing countries during 1980–2003. Klein (2012) finds that the countries with long-standing controls tend to be poor on average and that there is little evidence of capital controls affecting GDP. Moreover, Forbes and Klein (2015) find that capital controls would have significant effects in decreasing GDP growth. Mitchener and Wandschneider (2015) find that capital controls would not accelerate macroeconomic recovery.

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