Capital Controls: Gates versus Walls

This paper examines the pattern of controls on cross-border capital inflows and their association with measures of financial vulnerability, GDP, and exchange rates. A key distinction is made between long-standing controls that cover a broad range of assets (walls) and episodic controls that tend to be imposed on a narrower set of assets (gates). The paper presents a new data set that differentiates between controls on inflows and on outflows as well as among asset categories for 44 developed and emerging market economies over 1995-2010. The imposition of episodic controls is found not to have followed the prescriptions of theories that suggest first imposing controls on those inflows most likely to contribute to financial vulnerability. Estimates show significant differences in the partial correlations of long-standing and episodic controls with the growth of certain financial variables and with GDP growth, but these differences seem to arise because countries with long-standing controls are poorer on average than the other countries in the sample. With a few exceptions, estimates that control for GDP per capita find little evidence that capital controls affect the growth of these financial variables, the real exchange rate, or GDP growth at an annual frequency. These preliminary results raise doubts about assumptions behind recent calls for a greater use of episodic controls.