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The Impact of Capital Controls on Growth Convergence

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  • David J. Mckenzie

    (Department of Economics, Yale University)

Abstract

Both cross-sectional regression and panel data methods of growth convergence estimation are used to determine the impact of various forms of capital controls on economic growth and growth convergence. We suggest a method to control for measurement error in the cross-sectional regressions based on data quality estimates. The effect of capital controls is found to be strongly dependent on the specific type of control in place, with restrictions on current account payments having the most detrimental effect on growth. A key finding is the importance of interaction effects between capital controls and openness to trade, and capital controls and initial income. The interaction between capital controls and initial income suggests that not only do capital controls impair growth, they also reduce the rate of conditional growth convergence. The omission of these interactions may explain the failure of earlier cross-sectional studies to find effects of capital controls on growth.

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  • David J. Mckenzie, 2001. "The Impact of Capital Controls on Growth Convergence," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 26(1), pages 1-25, June.
    • Handle: RePEc:jed:journl:v:26:y:2001:i:1:p:1-25
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    1. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
    2. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
    3. Andrew van Hulten & Michael Webber, 2010. "Do developing countries need 'good' institutions and policies and deep financial markets to benefit from capital account liberalization?," Journal of Economic Geography, Oxford University Press, vol. 10(2), pages 283-319, March.
    4. Hélène Rey & Philippe Martin, 2006. "Globalization and Emerging Markets: With or Without Crash?," American Economic Review, American Economic Association, vol. 96(5), pages 1631-1651, December.
    5. Martin, Philippe & Rey, Hélène, 2002. "Financial Globalization and Emerging Markets: With or Without Crash?," CEPR Discussion Papers 3378, C.E.P.R. Discussion Papers.
    6. Zhou, Yang, 2024. "Benefits and costs: The impact of capital control on growth-at-risk in China," International Review of Financial Analysis, Elsevier, vol. 93(C).
    7. Georgios Chortareas & Georgios Magkonis & Demetrios Moschos & Theodore Panagiotidis, 2015. "Financial Development and Economic Activity in Advanced and Developing Open Economies: Evidence from Panel Cointegration," Review of Development Economics, Wiley Blackwell, vol. 19(1), pages 163-177, February.

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