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The Political Economy of Capital Controls

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  • Alesina, Alberto F
  • Grilli, Vittorio
  • Milesi-Ferretti, Gian Maria
Abstract
This paper studies the institutional and political determinants of capital controls in a sample of 20 OECD countries for the period 1950 89. One of the most interesting results is that capital controls are more likely to be imposed by strong governments, which have a relatively `free' hand over monetary policy, because the Central Bank is not very independent. By imposing capital controls these governments raise more seigniorage revenue and keep interest rates artificially low. As a result, public debt accumulates at a slower rate than otherwise. This suggests that an institutional reform which makes the Central Bank more independent makes it more difficult for the government to finance its budget. The tightening of the fiscal constraint may force the government to adjust towards a more `sound' fiscal policy. We also find that, as expected, and in accordance with the theory, capital controls are more likely to be introduced when the exchange rate is pegged or managed. We found no effects of capital controls on growth, however, and reject rather strongly the hypothesis that capital controls reduce growth.

Suggested Citation

  • Alesina, Alberto F & Grilli, Vittorio & Milesi-Ferretti, Gian Maria, 1993. "The Political Economy of Capital Controls," CEPR Discussion Papers 793, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:793
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    More about this item

    Keywords

    Capital Controls; Political Economy; Seigniorage;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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