The Siren Song of Capital Controls

Common Sense on Capital Controls

But re imposing capital controls is simply not a fruitful option.

Nor do these findings suggest that capital controls have no costs.

Capital controls, whatever their benefits in terms of mitigating the risks associated with volatile capital flows, are costly in a variety of ways.

But the rise would most likely be offset by capital outflows, as looser capital controls would enable savers to escape the financial crisis.

Others have been imposing capital controls of one stripe or another.

But capital controls are not the only variable that determines financial openness.

ITHACA, NEW YORK Capital controls are back in vogue.

This does not mean that capital controls can solve all problems the same paper shows that they are relatively ineffective at preventing lending booms another key cause of economic vulnerability.

The Chinese could abolish capital controls and let the renminbi s exchange rate float.

As the only major economy with capital controls, China has created its own exorbitant privilege it can determine its exchange rate because no other big countries impose capital controls.

Even the International Monetary Fund, long the embodiment of the Washington Consensus, has acknowledged that capital controls are a legitimate part of the toolkit to manage capital flows in certain circumstances.

Even the International Monetary Fund now recognizes that capital controls may be useful, especially in times of crisis.

But Chinese policymakers should also recognize the significant risks inherent in relaxing capital controls.

Small wonder, then, that several emerging economies are using capital controls to try to manage the flood.

Capital controls remain a bad idea an idea that is far more seductive in theory than in practice.

When dealing with surges of potentially destabilizing capital inflows, capital controls are a no no, but something called prudential regulation is quite okay.

President Luiz Inácio Lula da Silva had dismissed talk of capital controls just a few days before they were imposed.

Indeed, recent work in economic theory shows that capital controls can actually be the optimal policy choice.

Capital controls have real costs, even if they fail to stanch inflows.

The latter course risks the worst of all worlds all of the costs of capital controls and all of the domestic policy complications from volatile capital flows, but few of the potential benefits of foreign capital.

You can oppose capital controls because you believe financial markets are on the whole a force for good, and that any interference will therefore generate efficiency losses.

SANTIAGO Few policy debates are stranger than the one concerning capital controls.

So here we are with yet another twist in the never ending saga of our love hate relationship with capital controls.

Their reactions range from buying up the foreign money to prevent currency appreciation to adopting capital controls, and, in extreme cases, to keeping the money out altogether.

Referring to capital controls, John Maynard Keynes famously said what used to be heresy restrictions on capital flows is now endorsed as orthodoxy.

Several countries including Brazil, South Korea, and Turkey have now imposed capital controls of various kinds.

Capital controls, you are likely to be told, discriminate between transactions depending on the country of residence of the parties involved, and that is bad.

First, China needs capital controls to retain monetary policy independence until it is ready to adopt a floating exchange rate regime.

If capital controls can be easily evaded say, by manipulating the timing of transactions or through mis invoicing of trade flows then there will be little effect on the actual volume of capital inflows.

America s trade agreement with Chile, for example, impedes Chile s use of capital controls even though the International Monetary Fund now recognizes that capital controls can be an important instrument of macro prudential policy.

And, to address volatile capital flows, countries should increase exchange rate flexibility, maintain adequate international reserves, and implement carefully designed capital controls.

This suggests that capital controls and prudential policies can complement each other, contrary to what conventional wisdom often assumes.

On that day, the International Monetary Fund published a policy note that reversed its long held position on capital controls.

When asked about the role of capital controls, Strauss Kahn said he was not wedded to any rigid ideology on the subject.

It may seem curious that Strauss Kahn s instincts are so off the mark on the matter of capital controls.

Most economists in China seem to support the PBOC s stance, citing the potential benefits of capital account liberalization. But Chinese policymakers should also recognize the significant risks inherent in relaxing capital controls.

Owing to its underdeveloped financial system and inefficient capital markets, China would be unable to withstand an attack akin to those that triggered the Asian financial crisis without the protection of capital controls.

The Swiss have large reserves, but are so interlinked with global capital markets that exchange controls are not a realistic option. Most other Western countries, certainly the United States and the United Kingdom, are in no position to invest heavily to maintain a particular exchange rate.

Nor has it liberalized labor and product markets, and it maintains strict control over the exchange rate and capital account.

The big intellectual change has come from the International Monetary Fund, once an outright enemy of capital controls.

Those who claim that capital controls are ineffective seldom specifyat what they are presumed to be ineffective.

Iceland showed that responding to the crisis by imposing capital controls could help small countries manage its impact.

The ECB might have cut off emergency liquidity assistance, forcing the government to impose capital controls and even consider abandoning the euro.