Do Macroeconomic Effects of Capital Controls Vary by their Type? Evidence From Malaysia

Author: Ms. Natalia T. Tamirisa

Volume/Issue: Volume 2004 Issue 003

Publication date: January 2004

ISBN: 9781451841930

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Topics covered in this book

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Banks and Banking , Exports and Imports , WP , capital control , control , Malaysia , capital , interest rate , exchange , controls , portfolio , flows , investment , Asian crisis , portfolio capital , credit vis-à-vis nonresident , interest rate differential , capital control index , differential change , interest rate reduction , portfolio inflow , interest rate differential change , intensity of capital control , role of capital control , Malaysia's performance , Capital controls , Capital account , Capital adequacy requirements , Real interest rates , Real exchange rates , Global , error-correction model , capital account regulation , appendix Table

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Summary

This paper examines how the macroeconomic effects of capital controls vary depending on which type of international financial transaction they cover. Drawing on Malaysia's experiences in regulating the capital account during the 1990s, it finds, in an error-correction model, that capital controls generally have statistically insignificant effects on the exchange rate. Controls on portfolio outflows and on bank and foreign exchange operations facilitate reductions in the domestic interest rate, while controls on portfolio inflows have the opposite effect, in line with the theoretical priors. Controls on international transactions in the domestic currency and stock market operations have statistically insignificant effects on the interest rate differential.