chapter  6
29 Pages

Capital controls and banking crises

WithChia-Ying Chang

This chapter aims to develop a theoretical framework which incorporates the banking system to examine the impacts of capital controls to the economy and the effectiveness of capital controls, especially the ability of controls to prevent/to increase banking crises. While analyses how bank governance affect the banks' responses to the shocks and hence the possibility of banking crises, it analyses the linkages between the implementation of capital controls and the stability of the banking system. Since capital controls aim to control capital flows, it is important to understand what determines capital flows. Instead of analysing capital flows in general, some research approaches capital flows by looking at the composition of flows and the linkages to financial stability. Most comparisons have focused on either efficiency or welfare/social optima, and most studies find that the economy with capital controls can improve market efficiency and can be welfare improving compared to the economy with free capital mobility.