The distributional impacts of capital controls

ABSTRACT

The study examines the distributional implications of capital account restrictions on three important welfare measurements of concern for policymakers: income inequality, poverty, and external debt. Two approaches are followed, the Autoregressive Distributed Lag (ARDL), and the local projections regression with impulse response functions (IRFs), and applied to a panel data for 102 countries from 1995 to 2019. First, we identify the capital control periods, and second, we follow behavior of these three measurements after these periods. The results show a decline in income inequality and poverty and a decline in external debt. However, four pathways can affect the intensity of capital controls impacts, the financial development and the strength of the financial institutions, the financial crisis probability, the bargaining power of the labor market, and the cost of international debt. The study highlights that additional policies may be needed to redistribute some of the gains of capital controls.

KEYWORDS:

• Capital controls
• poverty
• inequality
• external debt
• macroeconomics
• financial liberalisation

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. This approach is used thereafter by Furceri, Loungani, and Ostry (2019); Bernal-Verdugo, Furceri, and Guillaume (2013).

2. The study apply the logarithm of these variables.

3. We refer to the results of Akaike information criterion to choose two lags on the variables.

4. 5 years is the IRFs time horizon.

5. Crisis can be banking, currency, or debt.

6. The data of this variable was tacked from the UN national accounts, table 203.