Measuring Capital Controls: Data, Methods, and Trade-offs across De Jure and De Facto Measures

Abstract

From the tightly managed capital accounts of the Bretton Woods era to today’s globally integrated financial markets, capital controls have fundamentally shaped the world economy. Yet, measuring these restrictions accurately remains a challenge for economic researchers. This article provides a comprehensive review of the major approaches to measuring capital controls that exist in the literature. These approaches can be categorized into two types: de jure measures, which capture legal restrictions as written in official policy documents, and de facto measures, which quantify the actual frictions restricting capital flows in practice. Using the United States and Mexico as case studies, we demonstrate that different measures of capital controls look very different, even when constructed from identical source materials. The article documents how these measures are constructed and illustrates the differences that emerge between them. We conclude that existing measures capture different elements of controls and should be viewed as complements rather than substitutes.

Introduction

Capital controls are regulations that restrict capital movements across countries, which have been central to international macroeconomics for decades. From the tightly managed capital accounts of the Bretton Woods era to the waves of liberalization in the 1980s and 1990s, these restrictions shape how capital moves across borders and influence macroeconomic outcomes including growth and economic stability. Understanding both the evolution of capital controls policies and their economic effects requires accurate measurement. Yet measuring capital controls is surprisingly difficult. Researchers must grapple with fundamental questions: What exactly should we measure? How do we capture restrictions that exist “on the books" versus those that actually bind capital flows in practice? And how do we construct measures that span decades of policy evolution when our primary data source has undergone major structural changes?

This article provides a summary of existing capital controls measures. We organize the literature into two types of capital controls: de jure measures, which track legal restrictions as written in official policy documents, and de facto measures, which capture the actual frictions that impede capital flows in practice. Most existing capital controls measures are de jure measures constructed using the International Monetary Fund’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER). First published in 1950, the AREAER remains the primary long-run source for tracking capital controls regulations across countries.