Common Sense on Capital Controls

The Siren Song of Capital Controls

The IMF Needs Fresh Thinking on Capital Controls

ITHACA, NEW YORK Capital controls are back in vogue.

It has rethought its traditional opposition to capital controls.

Prudential controls on capital flows make a lot of sense.

Unlike many Latin American and former Soviet bloc countries, where similar controls are honored mainly in the breach, violating capital controls in China is virtually a capital offense.

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.

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

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

They are resisting appreciation through foreign exchange intervention and capital controls.

Yet imposing capital controls on inflows is difficult and sometimes leaky.

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

As a result, Greece would be forced to impose capital controls.

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

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

So, does the new fascination with capital controls hold up to scrutiny?

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

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

This delicate situation could escalate into further currency intervention, trade protectionism, and capital controls.

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

Earlier this year, the International Monetary Fund came out in favor of capital controls.

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

What you can t do is oppose capital controls because they are both costly and ineffective.

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

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

The taboo that has attached to capital controls has discouraged practical, policy oriented work that would help governments to manage capital flows directly.

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

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

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

With the stigma on capital controls gone, the IMF should now get to work on developing guidelines on what kind of controls work best and under what circumstances.

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

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

Will the government liberalize interest rates or loosen capital controls? How will the fiscal system be revamped?

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

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

But China s draconian capital controls and massive financial repression currently disqualify it from anchoring the global economic system.

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

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

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

It can hold the fort because it maintains one of the world s strictest regimes of exchange and capital controls.

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

Furthermore, by a twist of language, regulations affecting capital flows are pejoratively called controls, rather than their correct name.

The Greek government institutes capital controls and is ultimately forced to issue drachmas in order to supply domestic liquidity.