Abstract:
This paper provides a conceptual and empirical framework for evaluating the impacts of capital controls on economic growth. In a small open economy that relies on successful investment projects to provide capital goods, capital control can be beneficial, since borrowing short-term debt can be harmful for output growth. Using a panel dataset covering 78 countries from 1995 to 2010, we find that capital controls on short-term debt increase shares of equity and direct investment, and ultimately promote growth; regulations on equity flows impede growth by indirectly increasing bond share in capital stock; and restrictions on direct investment have insignificant impact.
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