Restraining International Capital Movements: What Does It Mean?

Abstract:     
The 1990s have witnessed three broad periods of severe turbulence in international financial markets. The turmoil in Brazil, East Asia (Indonesia, Malaysia, South Korea, Thailand and the Philippines) and Russia in 1997-99 was preceded by the Mexican-Tequila crisis in 1994-95 and the virtual collapse of the European Exchange Rate Mechanism (ERM) in 1992-93. Each time a crisis has occurred, there have been calls for some kind of curbs on "speculative" foreign currency transactions and global capital movements. Though there has been much general debate recently about the pros and cons of restraining global capital movements, there remains substantial confusion and uncertainty about what exactly is entailed by the term. Popular discussion around this has typically been long on rhetoric and loose generalizations and acutely short on specifics. The principal aim of this paper is to help clarify thinking on the notion of restraints on capital account transactions, rather than provide a detailed analysis of their economic rationale (which is conventional wisdom by now). To this end, a categorization of capital restraints is provided to assist in the evaluation of various proposals for and against capital restraints. It is noted that restraints on capital movements may be divided into controls on capital account transactions per se (capital controls) and controls on foreign currency transactions (exchange controls). It is emphasized that when analyzing curbs on capital movements, the four key features to keep in mind are whether they are comprehensive or selective; whether they are meant to be temporary or permanent; whether they are imposed on outflows or inflows; and whether they are irect/administrative or price-based. Two specific country experiences with restraining capital movements, viz. Chile and Malaysia are highlighted and discussed.

Number of Pages in PDF File: 41

Keywords: capital controls, Chile, exchange controls, IMF, Malaysia, Tobin Tax

JEL Classification: F30, F31, F34

working papers series