International Capital Flows, Capital Controls and Institutions

Presenta: José Luis Ruiz, FEN-UChile

Abstract: Policymakers suggest introducing capital controls for portfolio investments to prevent large-scale capital inflows to prevent abnormal increases in exchange rates that could deteriorate levels of competitiveness. Similarly, higher levels of foreign direct investments may end up inflating local asset prices. On the contrary, capital controls contribute to reducing adverse effects on economic crises by outflows. We aim to fill a gap in the existing literature by considering capital flows as an externality that is affected by the institutional framework. We find that capital controls on portfolio investments prove to be effective if applied within a high-quality institutional framework. The latter effect is not direct for foreign direct investments, but reinforces the effect of capital controls.