Managing capital flow volatility with capital controls : do volatility-absorbing mechanisms matter?

This paper investigates the role of capital controls in managing volatile capital flows by examining how developing countries (DCs) absorb this volatility. Using data from 44 DCs over the 2000-2019 period, we distinguish the extent to which countries offset inflow surges with outflows. We find that higher capital controls fuel the volatility of inflows in countries where gross outflows heavily offset inflow surges. In contrast, capital controls reduce inflow volatility in countries that are less reliant on offsetting with gross outflows. We also provide evidence that capital controls can mitigate the impact of global shocks on volatility.