The effectiveness of capital controls: The experience of emerging markets

The purpose of this study is to test the effectiveness of capital controls. In this study the effectiveness of capital controls is analyzed by the event study approach. In the event study approach, the analysis of the effectiveness of capital controls is based on comparison of the pre-event and post-event data means in the terms of determined variables. In this context, by the matched sample test, including pre-event and post-event quarterly data of two years for each period is used in the terms of two determined periyods whether there is a statistically significant change in the means. For the application on emerging markets including Brazil, Colombia, Russia, Thailand, Indonesia and the Philippines, the quarterly data of 2006Q1-2012Q4 period is used. In this study, the effectiveness of capital controls is tested in the terms of net capital inflows, the real effective exchange rates and the current account balances variables. The findings obtained by the event study methodology show that capital controls do not curb the net capital inflows in all cases, do not reduce the real effective exchange rates pressures in most cases and have impact on the average of current account balances in a few cases. The overall results suggest that capital controls is not fully achieving the desired objectives for the investigated countries. Finally, for an effective capital controls policy, the responses of global market agents to the capital controls should be estimated correctly and the capital controls should be well-designed and implemented carefully on this basis. Keywords: Capital flows, capital controls, event study approach.