Do capital controls boost EME´s resilience to financial crises?

Abstract

Capital controls are again in vogue as a number of emerging markets have reintroduced these measures in recent years in response to a 'flood' of international capital. Policymakers use these tools to buttress their economies against the 'sudden stop' risk that accompanies international capital flows. Using a panel VAR model, we show that capital controls appear to make emerging market economies (EMEs) more resistant to financial crises by showing that lower post-crisis output loss is correlated with stronger capital controls. However, EMEs that employ capital controls seem to be more crisis-prone. Thus, policymakers should carefully evaluate whether the benefits of capital controls outweigh their costs.