Spillover Effects of Capital Controls on Capital Flows and Financial Risk Contagion, a paper co-authored by our school’s Associate Professors Gou Qin and Peng Yuchao, Professor Fan Haichao from Fudan University and Assistant Professor Xie Wenjing from Shanghai International Studies University, was officially accepted and published online by Journal of International Money and Finance, one of the world’s prestigious journals on international economics. The paper looks into the multilateral spillover effects of emerging economies’ capital control policies on cross-border capital flows and financial risk contagion, and has made major academic contributions to studies on the management of cross-border capital flows and financial risk contagion, providing important policy advice on options for emerging economies for the management of international capital flows, and the urgency of global coordination for multilateral financial governance.
The paper first empirically probes into the impact of a rising level of capital account controls in emerging economies on the capital inflows of other similar economies. On the four dimensions of region, capital market size, capital market risk and trade openness, the co-authors established similarity-weighted quarterly indicators for capital control levels of emerging economies by measuring the degree of similarity of relevant countries in terms of geography, economy and finance. According to the integrated and high-frequency data provided by EPFR about the cross-border allocations and flows of global funds in 2001-2015, the paper finds that as the level of capital controls in other countries similar to one country rises, so will the share of global fund allocations to this country, and the size of investments therein. The result holds up in the case of both overall and short-term capital account controls, and is mainly facilitated by the spillover effect of capital inflow controls. This shows that intensified capital control, esp. capital inflow control, by an emerging economy, will generate spillover effects on capital flows of other similar emerging economies.
Next, the paper further discusses the spillover effect of capital controls on financial risk contagion of other emerging economies. Empirical results indicate that extreme tail co-movements between a country’s capital market and developed capital markets notably increase as the degree of capital controls in other countries similar to it rises. This points to the spillover effect of capital controls on financial risk contagion among emerging economies. The core conclusion of the paper remains tenable after a series of robustness tests. To further enrich the mechanism of capital controls’ multilateral spillover effects on capital flows and financial risk contagion, the paper, based on a two-period multi-country model, also demonstrates the diversion effect and spillover effect of capital inflow controls on capital flows and financial risks.
