| Many national governments choose to hinder the process of financial integration by imposing restrictions on capital mobility. The majority of the International Monetary Fund member nations have enforced capital controls over the past decade. This dissertation attempts to advance our understanding of reasons for establishing capital restrictions, assess the effectiveness of such policies, and evaluate their costs.; The dissertation embodies four essays on capital controls. In Chapter 1, we justify the relevance of capital controls on the basis of markets' imperfections, discuss the main problems associated with measuring the level of capital mobility, review the pros and cons of capital controls, and delineate the focal points of debate in the extant literature.; Chapter 2 constructs a dynamic model of a multinational enterprise (MNE) to quantify the effects of various exchange control policies on a firm's debt and equity positions, innovations, and outputs at the headquarters and subsidiary. Both steady-state and transition analyses suggest a significant impact of exchange controls on MNE's operations. We find that lifting exchange controls produces an inflow of capital and technology into the less developed countries, leading to an increase in the steady-state foreign direct investment position and production. Our model also suggests that even short-term exchange controls have long-lasting negative effects.; In Chapter 3, we employ a vector autoregressive model to evaluate the interdependence among capital controls, foreign assets, production, prices, real exchange rate, trade balance, and foreign exchange reserves. Estimation results are used in simulating impulse responses and variance decompositions for 20 developing countries. We conclude that there is no overwhelming evidence that capital controls can significantly increase foreign assets, output, trade balance, or total reserves.; Finally, Chapter 4 uses frequency domain techniques to study how exchange rate and stock market volatility is influenced by capital controls. We find that capital control policies in Malaysia were successful in reducing the high-frequency volatility of differences in both stock market prices and exchange rates. The volatility of the differences and returns on Chilean stock market due to irregular components is higher after the removal of capital controls in September 1998. |
