Sticky capital controls

Abstract

With a new quarterly dataset on the intensive margin of priced-based capital controls, complemented with extensive measures (restrictions, prohibitions, and authorizations) constructed using text analysis, we document that capital controls are “sticky”. Changes to price-based controls do not occur frequently; and when they do, they display high autocorrelation. Extensive measures also show considerable persistence. We then augment a model of capital controls relying on pecuniary externalities with an (S,s) cost of implementing such policies, and illustrate how this friction goes a long way toward bringing the model closer to the data. When the extended model is calibrated to the countries in the new dataset, we find that the size of these costs is large, substantially reducing the welfare-enhancing effects of capital controls in the frictionless Ramsey benchmark without (S,s) costs. This calls for a richer set of policy constraints when modeling the optimal use of capital controls.