Some scholars view capital inflows as contractionary, but many policymakers view them as expansionary. Evidence supports the policymakers. This column introduces an analytic framework that knits together the two views. For a given policy rate, bond inflows lead to currency appreciation and are contractionary, while non-bond inflows lead to an appreciation but also to a decrease in the cost of borrowing, and thus may be expansionary.
Olivier Blanchard, Jonathan Ostry, Atish Ghosh, Marcos Chamon, 26 November 2015
Anil Ari, Giancarlo Corsetti, Andria Lysiotou, 10 August 2015
Cyprus has been striving to get back on its feet after a painful bailout in 2013. This column examines the lessons that could have been drawn from the Cypriot experience by Greece in its recent attempt to seal a bailout deal. Specifically, lengthy negotiations – while tending to mitigate the risk of contagion – offer little benefit for debtor countries, and capital controls, once implemented, cannot be easily undone. While they come too late for Greece, these lessons can be important for countries in need of financial assistance in the future.
Jon Danielsson, Ásdís Kristjánsdóttir, 11 June 2015
Iceland has just announced it is getting rid of its capital controls. This column argues that the government’s plan is a credible, efficient and fair plan to lift the costly and misguided controls.
Andrés Fernández, Michael Klein, Alessandro Rebucci, Martin Schindler, Martín Uribe, 02 April 2015
A renewed interest in capital controls following the Great Recession requires a serious empirical reconsideration of their effectiveness as policy instruments. This column introduces a new dataset that features unprecedented levels of disaggregation between asset categories, and distinguishes transactions between residents and non-residents. The ensuing debate should take note.
Laura Alfaro, Anusha Chari, Fabio Kanczuk, 22 January 2015
Capital controls are back in fashion. This column discusses new firm-level evidence from Brazil showing that capital controls segment international financial markets, reduce external financing, and lower firm-level investment. They disproportionately affect small, non-exporting firms, especially those more dependent on external finance. This suggests that macro-finance models focusing on aggregate variables are missing an important dimension by abstracting from firm-level heterogeneity.
Kris Mitchener , Kirsten Wandschneider, 18 August 2014
The IMF has recently revised its position on capital controls, acknowledging that they may help prevent financial crises. This column examines the effects of capital controls imposed during the Great Depression. Capital controls appear not to have been successfully used as tools for rescuing banking systems, stimulating domestic output, or for raising prices. Rather they appear to have been maintained as a means for restricting trade and repayment of foreign debts.
Paolo Giordani, Michele Ruta, Hans Weisfeld, Ling Zhu, 23 June 2014
Capital controls may help countries limit large and volatile capital inflows, but they may also have spillover effects on other countries. This column discusses recent research showing that inflow restrictions have significant spillover effects as they deflect capital flows to countries with similar economic characteristics.
Barry Eichengreen, Andrew Rose, 05 June 2014
Since the global financial crisis of 2008–2009, opposition to the use of capital controls has weakened, and some economists have advocated their use as a macroprudential policy instrument. This column shows that capital controls have rarely been used in this way in the past. Rather than moving with short-term macroeconomic variables, capital controls have tended to vary with financial, political, and institutional development. This may be because governments have other macroeconomic policy instruments at their disposal, or because suddenly imposing capital controls would send a bad signal.
Matthieu Bussière, Gong Cheng, Menzie Chinn, Noëmie Lisack, 16 March 2014
The financial crisis that swept the global economy at the end of 2008 provides a natural experiment to test the proposition that international reserves are useful during crises. This column presents cross-country evidence based on a panel of 112 emerging and developing countries. Countries with more reserves relative to short-term debt fared better.
Kristin Forbes, Michael Klein, 24 December 2013
Government interventions to control capital flows and reduce exchange-rate volatility have long been controversial. The Global Financial Crisis has made the debate more urgent. This column discusses recent research that evaluates such policies against the counterfactual of no intervention. Depreciations and reserve sales can boost GDP growth during crises, but may also substantially increase inflation. Large increases in interest rates and new capital controls are associated with reductions in GDP growth, with no significant effect on inflation. When faced with sudden shifts in capital flows, policymakers must ‘pick their poison’.
Barry Eichengreen, Poonam Gupta, 19 December 2013
Fed tapering has started. A revival of last summer’s emerging economy turmoil is a real concern. This column discusses new research into who was hit and why by the June 2013 taper-talk shock. Those hit hardest had relatively large and liquid financial markets, and had allowed large rises in their currency values and their trade deficits. Good macro fundamentals did not provide much insulation, nor did capital controls. The best insulation came from macroprudential policies that limited exchange rate appreciation and trade deficit widening in response to foreign capital inflows.
Friðrik Már Baldursson, Richard Portes, 12 November 2013
Iceland’s 2008 capital controls are still in place to prevent outflows of domestic holdings in failed cross-border banks. However, it is important for the country’s future economic prosperity to lift the capital controls without endangering financial stability. This column discusses the risks of capital controls and gives policy recommendations for cases of the three former major Icelandic banks.
Espen Henriksen, Finn Kydland, Roman Šustek, 02 October 2013
The monetary policy for Eurozone members is one-size-fits-all in an economic area rife with economic differences. Does this really make a difference? This column argues that even if each EZ member state had a fully independent monetary authority, monetary policies would likely still appear highly synchronised across EZ members.
Michael Klein, Jay Shambaugh, 27 September 2013
The ‘financial trilemma’ – that open capital markets and pegged exchange rates mean a loss of monetary autonomy – has recently been challenged. Some argue that even flexible exchange rates cannot assure monetary autonomy without capital controls, while others argue even countries with fixed exchange rates can gain autonomy through temporary capital controls. This column argues that free floating exchange rates do in fact allow autonomy, and partially floating ones allow partial autonomy. For countries with fixed exchange rates, capital controls provide monetary autonomy when they are widely applied and longstanding, but not when they are temporary and narrowly targeted.
Hélène Rey, 31 August 2013
The global financial cycle has transformed the well-known trilemma into a ‘dilemma’. Independent monetary policies are possible if and only if the capital account is managed directly or indirectly. This column argues the right policies to deal with the ‘dilemma’ should aim at curbing excessive leverage and credit growth. A combination of macroprudential policies guided by aggressive stress‐testing and tougher leverage ratios are needed. Some capital controls may also be useful.
Jon Danielsson, 28 March 2013
Cyprus has imposed temporary capital controls. This column sheds light on how temporary and how damaging they are likely to be, based on Iceland’s experience. The longer controls exist, the harder they are to abolish. Icelandic capital controls, which have been ‘temporary’ for half a decade, deeply damage the economy by discouraging investment. We can only hope the authorities that created the chaos in the first place realise that temporary really needs to mean temporary.
Márcio Garcia, 01 March 2013
Did inward capital controls work for Brazil? This column assesses the evidence, concluding that capital controls are desirable if they help avoid excessive debt and asset price bubbles, a risk given the appetite of foreign investors towards Brazilian assets. That said, policymakers needs to complement capital controls with foreign savings in order to enable an investment rate compatible with sustaining GDP growth.
Otaviano Canuto, Matheus Cavallari, José Guilherme Reis, 27 February 2013
Brazilian exports of goods and services have grown sharply in recent years, tripling since 2000. This column argues that Brazil’s export performance depends mostly on favourable geographical and sector composition effects and that a recent slowdown in industrial exports, production, and investments are not related to insufficient demand but rather supply-side inefficiencies and rising costs. Policymakers ought to aim for urgent progress on the nation’s microeconomic reforms agenda, an increase in the investment-to-GDP ratio, and improvements in human capital.
Michael Klein, 17 January 2013
Capital controls are back in vogue. This column argues that we should distinguish between episodic controls (gates) and long-standing controls (walls). Research shows that the apparent success of 'walls' in China and India tells us little about the consequences of capital controls imposed or removed in countries like Brazil and South Korea, as circumstances change. Walls and gates are fundamentally distinct, and policy debate needs to take into account these differences.
Olivier Blanchard, Jonathan Ostry, 11 December 2012
The IMF recently endorsed capital controls as useful policy responses to certain circumstances. This column explains the logic and the research that underpins the shift.