DP11689 | Modelling Portfolio Capital Flows in a Global Framework: Multilateral Implications of Capital Controls

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In the aftermath of the global financial crisis, many emerging market countries resorted to capital controls to tackle the excessive surge of capital inflows. A number of recent research papers have suggested that the imposition of controls may have imposed negative externalities on other countries by deflecting flows. Our aim in the research reported in this paper is to construct a comprehensive global econometric model which captures the dynamic interactions of capital flows with domestic and global fundamentals, and to assess the efficacy of capital controls and potential deflection eff ects on other countries. The results suggest that capital controls are e ffective for some countries in the short run, but have no lasting e ffects. Moreover, there is only limited evidence of deflection eff ects for a small number of emerging market countries.