Capital movement control policies: how effective are they?

Summary The multiplication of financial crises in emerging countries has revived the debate on capital controls. This paper seeks to highlight the role played by the free flow of capital in international financial instability and to justify the need to introduce controls. To what extent will control policies be effective in sanctioning the most volatile capital? To answer this question, we review the theoretical foundations of financial instability. We then analyze the different experiences with controls in the emerging countries studied and present the empirical work on the effectiveness of controls. Finally, to assess the effectiveness of controls, we construct a control index for each country. Then, based on panel data econometrics, we empirically test the effectiveness of controls on economic growth, FDI and portfolio investment for 18 emerging countries for the period 1990-2007.