Essays in Capital Controls, Capital Flows, and Exchange Rate Regimes Open Access
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This dissertation has three essays studying capital controls, capital flows and exchange rate regimes. The first chapter studies capital controls and real exchange rate misalignment based on the Balassa Samuelson theory. Balassa-Samuelson theory suggests that a poorer country should have a lower price level – or a more depreciated real exchange rate, and that a country with faster productivity growth should experience an appreciation of its real exchange rate. This chapter documents large and persistent real exchange rate deviations from the Balassa-Samuelson theory, and a failure of fast growth countries to appreciate in line with the Balassa-Samuelson theory based on a country level panel dataset. This chapter argues that with capital controls, less capital flows into countries with faster economic growth, and there is a slower appreciation of the real exchange rate. My results show that capital controls help explain the existence of countries’ large and persistent real exchange rate misalignment including both real exchange rate overvaluation and undervaluation. Moreover, this chapter finds that capital control policy is effective at undervaluing the real exchange rate. For a sub-sample analysis focusing on countries with faster economic growth that would have more pressure on real exchange rate appreciation suggested by the Balassa-Samuelson theory, this chapter finds that fixing the nominal exchange rate alone does not slow down the real appreciation. However, capital control policy is effective at keeping the real exchange rate largely undervalued and slowing down the speed of real exchange rate convergence, and allow countries to stay substantially undervalued for a considerable period of time. The second chapter examines the effectiveness of capital controls in limiting the size of capital flows based on a large panel data that covers 98 countries from 1995 to 2015. Results in this chapter show that imposing capital controls comprehensively that putting restrictions on almost all assets is the necessary condition to stem outflows. In addition, comprehensive capital controls can also be imposed episodically on reducing outflows even though a country had a fairly open capital account in the past. This provides policy rationale for using capital controls as a temporary tool on targeting outflows when needed. Last, on targeting a particular type of asset flows, this chapter finds that countries are able to reduce banking flows by closing assets channels that affect banking flows only. The third chapter explores the impact of monetary regime combinations of exchange rate flexibility and financial openness on stabilizing consumption growth in the post Bretton Woods era. Empirical results found in this chapter support the theoretical prediction for rich (High income) countries with open-float regime to have smaller consumption growth volatility. In contrast, for non-rich countries, several middle ground regime combinations, such the semiopen-softpeg regime, are associated with smaller consumption growth volatility, which is different from the theoretical prediction.