Essays on Empirical Analysis of Capital Controls
The Global Financial Crisis (GFC) of 2008-09 focused attention on the possibility that pre-crisis capital controls had beneficial effects on post-crisis GDP performance. The GFC provides a good case for such analysis, because it was almost unexpected and its impact was worldwide. The first chapter revisits this issue and makes two main contributions. First, I improve on the methodology of previous studies in our choices of control variables, measurement of capital controls, estimating timing of pre-crisis capital controls, and allowing for different types of capital flows. Second, I apply a new measure of crisis severity and apply it to the case of the impact of capital controls on post-crisis economic performance. Findings from cross-sectional regression show that in advanced countries a higher degree of pre-crisis outflow controls are associated with less severe GDP collapse. In emerging countries, any type of pre-crisis capital controls is not found significant. For developing economies, I found only a partial result that stricter pre-crisis debt inflow capital controls were associated with an even larger GDP collapse than in the absence of such controls.
The second chapter investigates the effects of ex ante capital controls in mitigating the output cost of the 2008-2009 Global Financial Crisis (GFC). Restrictions on capital accounts are accepted as a tool for ensuring financial stability among the policy community after the GFC, but the empirical evidence of capital controls' usefulness has not yet been clearly verified. I employ Imbens (2000)'s generalized propensity score (GPS) analysis using 88 cross-country data to handle this issue. GPS analysis is designed to find the average treatment effect where the treatment is continuous. The GPS approach in combination with the balancing property can remove all biases from country characteristics related to capital controls. I found indeterminate evidence that pre-crisis inflow capital controls successfully lessened the GDP cost of the GFC. In addition, I found a partial result that pre-crisis outflow capital controls may even worsen GFC crisis severity. A contribution of the second chapter is that the GPS method limits the endogeneity of capital controls. Another contribution is that I detect non-linear effect of capital controls on the economic stability.
According to "overborrowing" theory, financial globalization and the subsequent rise in consumption sourced by foreign debt in normal times can worsen the impact of financial crises. However, the theory of international risk sharing predicts that financial liberalization helps stabilize consumption behaviors. A contribution of the third chapter is that I investigate the effect of de jure financial liberalization in Korea on consumption growth in the context of the Global Financial Crisis using novel empirical methods. Another contribution of the third chapter is that I document Korea's de jure and de facto financial globalization episode in the 2000s and the sudden stop experience during the Global Financial Crisis (GFC) comprehensively. I found from IV regression that the economic effect of easing capital inflow controls in Korea was large for the acceleration of consumption growth, but this effect was statistically insignificant. Limited evidence from synthetic control matching shows that financial liberalization in Korea did not significantly affect consumption collapse during the GFC.