Policy Responses to Financial Crises: Capital Controls as an Alternative to IMF-Programs

Abstract

The purpose of this study is to compare the post–treatment economic performances of countries which implemented IMF- designed recovery programs, and the counterfactual, all-encompassing capital and exchange controls, as a policy response to financial crisis. By doing so, I aim to find out which policy response provides crisis-hit countries better assistance in the short-run recovery process.

I extend the scope of the Rodrik & Kaplan study by including additional IMF-assisted crisis countries Turkey, Brazil and Russia, and using them as comparators to Malaysia, which embarked on a range of strict capital and exchange controls.

By employing a time shifted difference–in-differences model, I obtain empirical evidence, consistent with the findings of Rodrik & Kaplan, which are overwhelmingly in favour of the capital controls as a provider of quicker and more successful recovery in the short-run.

When I test and correct for serial correlation using the quasi-differencing method, I find that the initial results which were highly in accord with the Malaysia capital controls, still prove to be more successful than IMF-designed orthodox programs, but are in fact a lot less successful than regression results had first implied.