Capital Controls and Electoral Cycles
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Capital Controls and Electoral Cycles Nicolas Gavoille1 · Katharina Hofer2
© International Monetary Fund 2020
Abstract This paper studies the relation between the evolution of capital controls and electoral cycles. We exploit a dataset containing detailed information on the level of restrictions on capital flows for 98 countries on an annual basis from 1995 to 2015, constructed by Fernandez et al. (IMF Econ Rev 64:548–574, 2016). First, we find that restrictions are more likely to increase during an election year. The relationship between changes in capital controls and elections is more robust than with any other economic variable. Second, these changes are driven predominantly by restrictions on capital outflows and on relatively liquid asset categories. Third, changes occur mostly after elections, though not exclusively. Finally, capital controls increase more if the new government is more leftist or less liberal than its predecessor, and greater electoral uncertainty is related to higher restrictions on capital flows. Overall, these results suggest that theories examining the cyclical properties of capital controls should also consider electoral cycles. JEL Classification F38 · D72 · E32
1 Introduction The Great Recession and the series of crises hitting countries with free capital mobility have put into question the long-standing paradigm that capital controls lead to inefficiencies, hampering economic growth. A theoretical literature has recently emerged, examining the conditions for capital controls to play a growth-enhancing role (Benigno et al. 2016; Bianchi 2011; Farhi and Werning 2014; Korinek and Sandri 2016; among many others). This literature suggests that policymakers should employ countercyclical capital control policies, with tighter controls accompanying booms * Nicolas Gavoille [email protected] Katharina Hofer [email protected] 1
Stockholm School of Economics in Riga, Strelnieku iela 4a, Riga 1010, Latvia
2
University of St. Gallen, Dufourstrasse 50, 9000 St. Gallen, Switzerland
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N. Gavoille, K. Hofer
and a release during busts—a view also (conditionally) embraced by the International Monetary Fund (IMF 2012). This theoretical framework, however, received mixed empirical support. While Aizenman and Pasricha (2013), Forbes et al. (2015) and Pasricha et al. (2018) provide evidence of a relationship between capital restrictions and macroeconomic variables, Fernández et al. (2015) show that booms and busts do not drive changes in the level of controls. This suggests that theory “may not be capturing all the relevant economic or political factors that determine the cyclical properties of optimal capital controls” (Fernández et al. 2015; emphasis added). What actually drives the evolution of capital controls remains an open question. The aim of this paper is to investigate the relation between electoral cycles and the evolution of capital controls. To understand the relevance of elections, consider the 1981 French presidential election. Francois Mitte
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