Conditions for the success of capital controls: The elasticity approach

Capital controls are a commonly used instrument to manage capital flows. However, their effectiveness in reducing short-term capital flows is still unclear. The present study proposes a new approach to the evaluation of the effects of capital controls, by proposing a model in which these effects depends on the elasticity of short-term capital flows relative to total flows. When capital controls are in place, achieving an elastic demand reduces these short-term flows, while an inelastic demand may increase them. The proposition of the model is empirically verified by computing the elasticity approach for 33 countries. This approach suggests that policymakers take proactive actions against the fickleness of short-term capital flows.