Introduction 7 analysis in various ways and tackling the issues from various angles to get a better picture of the real impacts of capital controls before implementing/liberalizing capital controls.
The effectiveness of capital controls Depending on the goals one wishes to achieve, there are many definitions of the effectiveness of capital controls. In general, according to Edwards (2001, 2007a, 2007b), the goals of capital controls can be summarized as (1) restricting the volumes and compositions of flows, (2) gaining monetary autonomy and (3) reducing fluctuations and preventing crises. Empirically, the findings regarding the effectiveness of capital controls are mixed in several ways. One example regards the effects of controls on capital flows. Forbes and Warnock (2012) find that capital controls have little association with foreign-driven capital flows. However, El-Shagi (2010) discovers that capital controls can restructure capital flows without distortion but does not specify whether the capital flows to be restructured by controls are limited to foreign- or domestic-driven flows. Without the specification of foreign-/domestic driven flows, it is difficult to conclude whether the two results are inconsistent. Another example regards general versus specific patterns of flow. Forbes and Warnock (2012) focus on general patterns of flow waves during specific periods. Meanwhile, El-Shagi (2010) focuses on the panel data of specific countries. If the patterns found in specific countries differ from Forbes and Warnock (2012), should the results be considered as inconsistent? Note that patterns may depend on the datasets and the methodology adopted for the empirical studies. Various datasets may have different definitions and measurements both within and across countries and across time. While using the term “capital flows”, some studies analyse gross flows; some use net flows; some did not mention whether it is gross or net flows. Therefore, it has been challenging to compare various empirical studies related to capital flows and controls. In order to overcome the challenges of empirical studies, Eichengreen (2004, p 51) takes the first step by exploring the problems and limitations of the measures based on statute, on actual flows and on asset prices. He concludes that with various measures, the results of studying the effectiveness of capital account liberalization are various and inconsistent, and that the consistency depends crucially on the measures and the data. Therefore, although it is challenging to unify the definitions and measures of datasets, especially for historical datasets, it is important and crucial to take steps to clarify specific issues of debates and to understand better various empirical studies on capital flows. Note that the challenges mentioned earlier have not accounted for the policy shifts between various capital controls as well as on and off controls from time to time. Even though some challenges may be overcome by further developments in empirical methodology and measurements, some challenges require a structured theoretical analysis to clear the road for the next step or directions. These challenges explain why Magud and Reinhart (2007) call for the development of a unified theoretical framework to resolve the existing apple-to-orange problems
