Capital Account Regulations, Foreign Exchange Pressure, and Crisis Resilience
Working Paper #280
This paper examines whether capital account regulations are effective in reducing foreign exchange pressure and real exchange rate appreciation. Using four indices of capital inflow regulations, foreign exchange-related regulations, financial sector specific restrictions, and capital outflow regulations for 51 emerging and developing economies over the period 1995-2011, we find that all policy measures except financial sector specific restrictions are associated with lower foreign exchange pressure and reduced real exchange rate appreciation, and that the effects of capital outflow regulations are larger in magnitude than those on capital inflows. We also find that capital account regulations enhance monetary policy autonomy by reducing the effect of interest rate differentials on nominal exchange rates. Our results further indicate that increasing the restrictiveness of capital account regulations in the run-up to the crisis reduced the growth decline during the crisis, thus enhancing crisis resilience, and that countries that used capital account regulations experienced less overheating during post-crisis recovery when there was a new surge in capital inflows. The latter two results imply that capital account regulations are a powerful counter-cyclical policy instrument.
About the Authors
Postdoctoral Research Scholar
Committee on Global Thought
Bilge Erten is a Postdoctoral Research Scholar at Committee on Global Thought, Columbia University. She completed her Ph.D. in Economics from the University of Massachusetts Amherst in 2010. Her current research focuses on the use of macroprudential and capital account policies by developing countries to manage foreign exchange pressure, improve monetary policy autonomy, and enhance crisis resilience and post-crisis overheating in a counter-cyclical way. In particular, her research analyzes the macroeconomic effectiveness of capital account regulations including capital inflow/outflow restrictions, foreign exchange related prudential measures, and financial sector specific regulations on international borrowing.
José Antonio Ocampo
Professor of Professional Practice at Columbia University and former Minister of Finance of Colombia
Jose Antonio Ocampo is a Professor of Professional Practice in the School of International and Public Affairs and former Minister of Finance of Colombia. He is also a Fellow of the Committee on Global Thought at Columbia University. Prior to his appointment at Columbia, Professor Ocampo served as the United Nations Under-Secretary-General for Economic and Social Affairs, and head of UN Department of Economic and Social Affairs (DESA), as Executive Secretary of the UN Economic Commission for Latin America and the Caribbean (ECLAC), and has held a number of high-level posts in the Government of Colombia, including Minister of Finance and Public Credit, Director of the National Planning Department, and Minister of Agriculture . Professor Ocampo is author or editor of over 30 books and has published over 200 scholarly articles on macroeconomic theory and policy, international financial issues, economic development, international trade, and Colombian and Latin American economic history.