Too Much of a Good Thing: The Macroeconomic Effects of Taxing Capital Inflows

Abstract

During the 1990s a number of developing countries have introduced a variety of measures designed to curb capital inflows. Many of these measures were either used countercyclically, announced as temporary, or de facto became so because agents found means to circumvent the restrictions. This paper presents a framework that facilitates the analysis of the macroeconomic effects of "temporary" capital controls. The stylized facts of several recent episodes in Asia, Eastern Europe, and Latin America are also examined so as to assess whether these measures achieved some or all of their macroeconomic objectives. We conclude that, in most of these instances, the measures were capable of either reducing the overall volume of inflows, altering their maturity profile, or both over the short run but had little effect on consumption, the current account, or the real exchange rate.

JEL Classification: E61, F33, 011