Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/261300 
Authors: 
Year of Publication: 
2022
Publisher: 
ZBW – Leibniz Information Centre for Economics, Kiel, Hamburg
Abstract: 
Capital control is used as policy toolkit for safeguarding domestic economy from the volatility of capital flows. However, the effect of capital control is rather far fetched as the signaling effect of capital control can moderate investor's outlook about domestic economy and thereby outweighs the intended effect. The spillover effect, on the other hand, modulates the capital flows to other countries when one country increases capital account restrictions. Further, the effect of capital control can have varying impact on capital inflows to different sectors as recent studies indicate heterogeneity in the drivers and nature of capital inflows to different institutional sectors. With the background, the paper analyzes the heterogeneous direct and spillover effect of capital control on gross capital flows across three major institutional sectors namely public, banks and corporate. The paper validates the possible heterogeneity in the effect of capital control on the capital inflows to these institutional sectors using spatial econometric models. The paper observes that the direct effect of capital control moderates portfolio inflows to public sector whereas the effect is insignificant on portfolio inflows to banks and corporate sector. Further, the paper observes that the spillover effect of capital control is broad-based i.e. equally prevalent on all sectors. The paper explains the heterogeneity in the capital control effects by introducing signaling effect in a portfolio choice model. The paper argues that the heterogeneous direct effect is driven by private signals of capital control received by the investors about the state of economy whereas the spillover effect of capital control is mainly driven by the hedging and search for better returns. The paper extends the existing literature of capital controls by reviewing the sectoral heterogeneity in the capital flows.
Subjects: 
Capital control
Spillover effect
Portfolio Choice
Signaling effect
Spatial Durbin Model
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.