Andrés Fernández, Banco Central de Chile

Sala 209

“Sticky Capital Controls”

Coautoreado con Laura Alfaro y Miguel Acosta-Henao

Abstract: Much debate remains on capital controls as useful policy instruments. This is partly due to the lack of empirical studies that look at the intensive margin of controls. This, in turn, has prevented a quantitative assessment of models of optimal capital controls in terms of their empirical performance when accounting for the observed behavior of controls. We contribute to this debate by addressing both positive and normative features of capital controls. On the positive side, using a new dataset built using textual analysis, we document the key stylized facts of capital controls along the intensive and extensive margins for 21 emerging markets. We find that capital controls are “sticky”: conditional on being used, their changes occur rather infrequently, with large heterogeneity in their intensity, and display very little mean reversion. Moreover, controls have not been used systematically across time or countries. On the normative side, we show that capital control models relying on pecuniary externalities are unable to account for this stickiness. We propose an extension to this set up that postulates an Ss-type cost of implementing capital controls bringing the model closer to the data. These costs reduce the welfare-enhancing effects of capital controls by as much as half, compared to the Ramsey benchmark with no Ss costs. While we do not microfound such costs, we conclude with a discussion of their potential causes which calls for a richer set of policy constraints when considering an optimal use of capital controls.