Macroeconomic Effects of Capital Account Regulations

We analyze the effects of capital account regulations (CARs) across a large sample of emerging economies on a range of macroeconomic outcomes. We use composite indices of these regulations to capture their intensity in coverage and employ an instrumental variables strategy to overcome the endogeneity of regulations to outcomes. We estimate the effects of CARs on real exchange rate appreciation, foreign exchange pressure, crisis resilience, and post-crisis overheating using annual data from 1995 to 2011 for 51 emerging economies. We find that all CARs, except the financial sector-specific restrictions, reduce foreign exchange pressure and real exchange rate appreciation, contributing to greater macroeconomic stability. Our results further indicate that increasing the restrictiveness of CARs in the run-up to the crisis moderates the growth decline, thus enhancing crisis resilience, and that countries that used CARs experienced less overheating from capital inflow surges during post-crisis recovery. The latter two results imply that CARs are useful countercyclical policy instruments. Our estimates provide evidence in favor of models in which imperfect capital mobility can generate sustained effects on real exchange rates.