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Capital controls in the 21st century

From VoxEU by Barry Eichengreen, Andrew K Rose:

Capital controls are back. The IMF (2012) has softened its earlier opposition to their use. Some emerging markets – Brazil, for example – have made renewed use of controls since the global financial crisis of 2008–2009. A number of distinguished economists have now suggested tightening and loosening controls in response to a range of economic and financial issues and problems. While the rationales vary, they tend to have in common the assumption that first-best policies are unavailable and that capital controls can be thought of as a second-best intervention. One set of studies considers a setting in which output fluctuates because nominal wages are rigid and monetary policy is not available to manipulate the price level (Schmitt-Grohe and Uribe 2012a, 2012b, Farhi and Werning 2012). A second strand characterises capital controls as a device for optimally manipulating the international terms of trade (De Paoli and Lipinska 2013). A final strand argues for the flexible use of capital controls to buttress financial stability (Ostry et al. 2012, Forbes et al. 2013).

However intriguing the arguments, the approach they recommend is one with which we have little experience. As we show in a new CEPR Policy Insight, governments have rarely imposed or removed capital controls in response to short-term fluctuations in output, the terms of trade, or financial-stability considerations. Once imposed, controls stay in place for long periods. Once removed, they are rarely restored. Rather than fluctuating at a business cycle frequency, the intensity of controls tends to evolve over long periods in line with variables like domestic financial depth and development, the strength of democratic checks and balances, and the quality of regulatory institutions, which similarly evolve slowly over time.

We as a profession simply have little knowledge of how the economy will operate if capital controls are adjusted at high frequency, since controls have historically been adjusted infrequently.


In 1996, 169 countries and territories provided the IMF data concerning controls on capital market securities; 127 of these had restrictions.1 That is to say, these controls were pervasive. Of those same 127 countries, some 116 (91.3%) still had such controls in 2012. That is, controls were persistent. And, as shown in Table 1, what was true of controls on capital market securities was true of other capital control measures as well.


Table 1. Percentage of 1996 controls persisting in 2012



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