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Capital Flow Deflection
Author:
Paolo Giordani null

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Michèle Ruta
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Hans Weisfeld
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Ling Zhu null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2014: Issue 145
Language:
English
Publication Date:
08 Aug 2014
DOI:
https://doi.org/10.5089/9781498383202.001
ISBN:
9781498383202
ISSN:
1018-5941
Pages:
47
Keywords:
WP; capital control; interest rate; capital flows; capital controls; cross-border spillovers; policy response; flow deflection; borrowing country; inflow control; spillover effect; capital flow deflection; Capital inflows; Real interest rates; Capital outflows; Global; Africa
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper focuses on the coordination problem among borrowing countries imposing controls on capital infl ows. In a simple model of capital flows and controls, we show that inflow restrictions distort international capital flows to other countries and that, in turn, such capital flow deflection may lead to a policy response. We then test the theory using data on inflow restrictions and gross capital inflows for a large sample of developing countries between 1995 and 2009. Our estimation yields strong evidence that capital controls deflect capital flows to other borrowing countries with similar economic characteristics. Notwithstanding these strong cross-border spillover effects, we do not find evidence of a policy response.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund