Capital Controls, Capital Flow Contractions, And Macroeconomic Vulnerability
In this paper author analyzes whether restrictions to capital mobility reduce vulnerability to external shocks. More specifically, Author asks if countries that restrict the free flow of international capital have a lower probability of experiencing a large contraction in net capital flows. He uses three new indexes on the degree of international financial integration and a large multi-country data set for 1970-2004 to estimate a series of random-effect probit equations. He finds that the marginal effect of higher capital mobility on the probability of a capital flow contraction is positive and statistically significant, but very small. Having a flexible exchange rate greatly reduces the probability of experiencing a capital flow contraction.