What Is the Impact of Capital Controls?

There is a burgeoning literature on the role and efficacy of capital controls. At the risk of generalising, most of the literature has found that controls on capital inflows are more effective than on outflows, and they are also more effective at altering the composition of inflows rather than the magnitude of inflow surges per se. In particular, controls seem to play a role in raising the average maturity structure of capital inflows (Binici et al., 2010 and references cited within), presumably making the country somewhat less susceptible to sudden stops and accompanying adjustment costs. However, this advantage comes with a cost, namely, there is evidence that capital controls on inflows tend to raise the cost of capital especially to small and medium sized enterprises (SMEs) (Forbes, 2007). However, most of the cross-country macro literature on the subject tends to be somewhat aggregated in nature, focussing only on the extent of capital flows, often failing to distinguish between the composition of capital flows and, more importantly, not differentiating between gross versus net flows.1