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Abstract
In the run up to the financial crisis of 2007–2009 many developing nations were subject to massive inflows of capital, capital that their financial systems found difficult to absorb. One of a number of policy options to respond to such inflows is unremunerated reserve requirements (URR). Two countries, Colombia and Thailand, deployed URR in the second half of the decade. This paper analyses the effectiveness of the URR in those two instances. We find that URRs were modestly successful in Colombia and Thailand. In Colombia, the controls were able stem an asset bubble in the stock market. In Thailand, the URR reduced the overall volume of flows, and the announcement of the URR caused a sharp drop in asset prices. However, some of the other goals of capital controls were not fulfilled. The results in this paper demonstrate that there is still a role for capital controls in the twenty-first century, but such controls should be more sophisticated than in years past.
Notes
This article was originally published with errors. This version has been amended. Please see Corrigendum (http://dx.doi.org/10.1080/02692171.2013.791073).
2. Ideally, we would use indices that exclude the country investigated to avoid endogeneity, but unfortunately regional indices excluding Colombia and Thailand were not available. However, considering the small size of their economies compared with Latin America and Asia respectively, the endogeneity was likely small and would not significantly affect the results.