Roberto Chang, Rutgers University

Paper: Capital Controls on Outflows: New Evidence and a Theoretical

Abstract: We present new empirical evidence on the use of capital controls on outflows (CCOs) in times of economic crisis, and develop an associated theory. Our evidence indicates that episodes of CCO implementation coincide with macroeconomic and financial stress. Accordingly, we build a model consistent with that fact, and then use it to extract policy and welfare implications of CCOs. The model features costly coordination failures by foreign investors, which can be avoided by suitably tailored CCOs. The benefits of CCOs as coordination devices can make them optimal even if CCOs entail deadweight losses; if the latter are large, however, CCOs are detrimental for welfare. We also discuss how time inconsistency and political opportunism may limit CCO policy, so that government credibility and reputation building are critical for the successful implementation of CCOs.