Do the Macroeconomic Effects of Capital Controls Vary by Type? Evidence from Malaysia

This paper examines how the macroeconomic effects of capital controls vary by type, depending on which international financial transactions they cover. Analysis draws on the experience of Malaysia, a country that used a gamut of permanent and temporary capital controls over the past decade. In an error-correction model, we find that controls on portfolio inflows, and restrictions on bank, foreign exchange, and stock market operations helped drive a wedge between domestic and international interest rates. This finding is robust to alternative specifications of the model and alternative measures of capital controls. Controls on portfolio outflows and international transactions in the Malaysian ringgit do not appear to have been instrumental in providing more monetary independence to the authorities.