Capital Controls in Malaysia: Effectiveness and Side Effects

In 1998 and 1999, following the East Asian financial crisis, Malaysia imposed a set of constraints and taxes on the movement of capital out of the country. Using a quantitative equilibrium model, we attempt to construct estimates of the effects of these controls on Malaysia's recovery from the crisis. The analysis relies on a model of a dependent economy with taxation on capital movements. We focus on the aftermath of a financial panic (the East Asian crisis) in which effective international interest rates rise. Capital taxation implicitly ameliorates the brunt of such a rise in the interest rate and substantially limits its real effects. This amelioration is shown to be especially significant under fixed exchange rates. Copyright (c) 2002 Center for International Development and the Massachusetts Institute of Technology.