Do capital controls help to manage capital flows in developing countries? Evidence from linear and nonlinear panel estimations

With the recognition of risks arising from the increasing volume and volatility of capital flows, particularly after the global financial crisis, many developing countries have started to impose capital controls to cope with macro-financial instability. To improve our understanding of the role of capital controls in managing capital flows, this study investigates whether restrictions on inflows and outflows have an impact on gross flows. Further, this paper questions whether the financial development level of countries has a role in the effectiveness of capital control policies. Utilizing a dataset encompassing 44 developing countries from 1998 to 2017 and employing linear and nonlinear panel data techniques, the findings indicate that tighter outflow controls lead to a decrease in gross outflows. In contrast, the gross inflows and the volatility of each flow do not significantly respond to the increases in restrictions. The results of further investigation based on nonlinear estimations reveal that when countries go beyond a certain threshold level of financial development, tighter capital controls lead to a reduction in the size of gross inflows.