Capital Controls and Electoral Cycles

New SSE Riga/BICEPS research paper by  Nicolas Gavoille (SSE Riga) and Katharina Hofer (Swiss Institute for Empirical Research, University of St.Gallen).

Abstract. This paper studies the relation between the evolution of capital controls and electoral cycles. We exploit a dataset containing detailed information on the level of restrictions on capital flows for 98 countries on an annual base from 1995 to 2015, constructed by Fernandez et al. (2016). First, we find that restrictions are more likely to increase during an election year. Elections prove to be more closely related to changes in capital controls than any economic variable. Second, these changes are driven predominantly by restrictions on capital outflows and on relatively liquid asset categories. Third, changes tend to occur after elections rather than before. Finally, capital controls increase by more if the new government is more leftist or less liberal than its predecessor, and more electoral uncertainty is related to higher restrictions on capital flows. Overall, these results suggests that theories examining the cyclical properties of capital controls should also consider electoral cycles.

Keywords: Capital controls, Election, Electoral cycles

JEL: D72, J45, C14