The IMF's Reassessment of Capital Controls after the 2008 Financial Crisis: Heresy or Orthodoxy?

Abstract

Capital account liberalization has long been viewed as an essential element of an integrated global economy. While the IMF allows countries to limit the flow of capital through the use of capital controls, it has since the 1980s discouraged this practice and instead promoted capital account liberalization as a means for developing countries to attract the foreign investment needed for economic growth. However, after the 2008 financial crisis, the IMF increasingly supported the use of capital controls, often referred to as “capital flow management measures,” for countries that were vulnerable to the effects of volatile capital flows. In 2012, the IMF changed its official position on the use of capital controls from permitted but discouraged to accepted in certain circumstances. The effectiveness of capital controls, however, has long been a subject of intense debate. The interconnected nature of the global economy and the difficulty in administering capital controls leads to doubts about their effectiveness. There is uncertainty as to what controls to use and the effect that controls actually have on capital flows and currency exchange rates. This paper will discuss the recent reconsideration of the use of capital controls.

Note: This paper will be published in the UCLA Journal of International Law and Foreign Affairs and is posted on SSRN in advance of publication with the permission of the UCLA Journal of International Law and Foreign Affairs.

Keywords: capital controls, IMF, International Monetary Fund, financial crises