The information content of capital controls

Capital controls, policy measures used by governments to regulate cross-country financial flows, have became standard options in many emerging market economies. This paper will focus on what capital controls convey about the state of economy and implications such revelation for efficacy. Empirically, this finds that important information participants use improve their understanding economic fundamentals. Using a small open model with collateral constraint over-borrowing relative social optimum, I incorporate representative agent’s Bayesian updating response change show efficacy correct mitigate negative impact crises could be undermined if agent rationally learns from policy. highlights need policymakers take into account unintended consequences design flow management policies.