Capital Mobility
Controlled taxation

Numerous theoretical studies have examined the effects of capital controls on economic policy, possible motivations for their introduction, their welfare implications and the `sequencing' of reforms leading to their removal. The empirical literature has focused on the extent of capital mobility, the impact of controls on interest differentials and their effectiveness in `segmenting' financial markets. In Discussion Paper No. 793, Research Fellows Alberto Alesina and Vittorio Grilli, with Gian Maria Milesi-Ferretti, investigate the empirical relation between the presence of capital controls and structural economic and political factors for a sample of 20 OECD countries during 1950-89.

They first regress a variable with a value of one when capital controls are in place and zero otherwise on a variety of economic, political and institutional variables. Their preliminary results reveal that the political leaning of the government has no effect on the likelihood of controls, but this increases with their strength (whether politically relative to the parliamentary opposition or institutionally relative to the central bank), the size of the agricultural relative to the service sector and the stability of the political system. Controls are also more likely under managed exchange rates than a free float.
The authors then investigate the joint effects of capital controls with other political and institutional variables on macroeconomic variables such as inflation and seigniorage, public debt, real interest rates and growth. Isolating their impact is difficult, but capital controls appear to restrict portfolio diversification into foreign currency assets and facilitate administrative measures to keep domestic interest rates artificially low. Capital controls raise inflation and seigniorage revenues significantly and are associated with lower domestic real interest rates (after controlling for political and institutional variables and for domestic debt respectively). Finally, however, the data reject quite strongly the common view that capital controls impede growth.

The Political Economy of Capital Controls
Alberto Alesina, Vittorio Grilli and Gian Maria Milesi-Ferretti

Discussion Paper No. 793, June 1993 (IM)