Capital flow deflection under the magnifying glass

Leveraging on a new quarterly dataset of capital control adjustments, we find renewed evidence that the introduction or tightening of capital controls in one economy increases capital inflows to other similar borrowing economies, an effect often called capital flow deflection. However, not all flows...

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Bibliographic Details
Published in:International journal of finance and economics 2024-07, Vol.29 (3), p.3758-3778
Main Authors: Gori, Filippo, Lepers, Etienne, Mehigan, Caroline
Format: Article
Language:English
Subjects:
bilateral capital flows
capital controls
deflection
emerging markets
regulatory war
spillovers
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Summary:Leveraging on a new quarterly dataset of capital control adjustments, we find renewed evidence that the introduction or tightening of capital controls in one economy increases capital inflows to other similar borrowing economies, an effect often called capital flow deflection. However, not all flows are deflected alike. Capital flow deflection is primarily driven by portfolio investment and bank credit, and only controls targeting these types of flows generate this externality. Moreover, analysing bilateral capital flows in order to capture investing countries' characteristics, we find that capital controls tend to deflect flows from advanced economies' portfolio equity investors, while controls on bank‐related flows primarily deflects lending from emerging market banks.
ISSN:1076-9307
1099-1158
DOI:10.1002/ijfe.2847