Faculty Sponsor: Ryuichiro Izumi
Abstract: While theoretical models (Bianchi 2011, Korinek 2018) have advocated for capital controls to be used as a prudential policy tool to both promote financial stability and reduce adjustment costs arising from rigidities during economic downturns, recent empirical literature has found capital controls on both inflows and outflows to be highly persistent across time and unresponsive to cyclical fluctuations in macroeconomic variables (Eichengreen 2014, Fernandez 2015). We examine if this observed acyclicality holds true across country subsamples when we classify countries by the cyclicality of their fiscal and monetary policy regime. Our results suggest that capital controls of all types are indeed acyclical across regime types, with the notable exception of fiscally countercyclical regimes, whereby governments adopting fiscal demand management policies also appear to use capital inflow controls as a countercyclical policy tool.
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