Unleashing Capital

Posted: 31 Dec 2000

See all articles by Carlos F. Liard-Muriente

Carlos F. Liard-Muriente

Central Connecticut State University - Department of Economics

Date Written: October 2000


From East to West, in emerging and developing countries, persistent capital inflows have caused a real appreciation of the domestic currency which undermines competitiveness and threatens to slowdown growth. Monetary policy is jeopardized as unexpected surge in inflows impose either higher inflation, or an excessive nominal appreciation. Government intervention is prompted either to limit inflows likely to be reversed, or to cope with exchange rate appreciation pressures arising from large capital inflows. Capital controls, taxes and sterilization are the best intervention examples.

From one perspective, capital controls limit the ability of international financiers and multinationals to curtail labor. However, from the mainstream perspective, capital controls are just bad policies. They remove the discipline of the international market, which rewards countries that pursue pro-growth policies and penalizes those that do not.

Controls are everywhere, it is a stylized fact. Nevertheless, following mainstream theory, capital controls are the wrong medicine. Thus, we have a contradiction. The stylized facts show that governments use controls regularly, but mainstream theory points to the other direction. The purpose of this paper is to explore that contradiction by confronting theory with the stylized facts. A summary of the visions in favor and against capital controls is presented, followed by some historical and stylized facts regarding capital controls. Then, some simple theoretical constructions are elaborated to put together mainstream arguments with stylized facts.

Keywords: capital controls, cooperation

JEL Classification: F32, F33, F42

Suggested Citation

Liard-Muriente, Carlos F., Unleashing Capital (October 2000). Available at SSRN: https://ssrn.com/abstract=247542

Carlos F. Liard-Muriente (Contact Author)

Central Connecticut State University - Department of Economics ( email )

MS 304
1615 Stanley Street
New Britain, CT 06050
United States
860-832-2732 (Phone)

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