A reexamination of capital controls' effectiveness: Recent experience of Thailand

This paper investigates the impact of the Unremunerated Reserve Requirement (URR) measure recently imposed in Thailand by applying three quantitative techniques of Edison and Reinhart (2001). We find that the URR measure was not completely effective in stabilizing the exchange rate, which was its original purpose. Although the THB onshore rate became more stable and less interdependent after the implementation of the URR, it was not completely isolated from other Asian currencies. Meanwhile, the URR measure was successful in reducing the total of net capital inflow and altering its composition toward preferable long-term investment, but it was unsuccessful in reducing short-term private external debt. In addition, since foreign equity investment was exempted from the measure, short-term capital inflows were forced to go mainly through the stock market; consequently, the URR had a limited impact on the equity market. Lastly, we find some side-effects of the measure, namely a wider spread between onshore and offshore rates, a bearish market sentiment, an obstacle to the debt market development, and a negative effect on the credibility of the Monetary Authority.