How effective are capital controls?

by on April 1, 2013 at 12:12 pm in Economics, History | Permalink

In general, capital controls are found to have little impact on the total volume of capital inflows and thus on currency appreciation.  For example, the imposition of inflow restrictions by Brazil, Chile, and Colombia in the 1990s had no significant impact on total capital inflows, nor were pressures on the exchange rate alleviated.  In fact, over the course of their capital controls, the real effective exchange rate appreciated by about 5 and 4 percent annually in Brazil and Chile, respectively.  In Thailand the real exchange rate started appreciating within a week after controls of short-term flows were imposed in December 2006. The most recent episode of control in Colombia (during 2007-08) was also ineffective in reducing the volume of non-FDI inflows or in moderating the currency appreciation…

That is from Jonathan D. Ostry, “Managing Capital Inflows: Old and New Debates,” in The Great Recession: Lessons for Central Bankers, edited by Jacob Braude, Zvi Eckstein, Stanley Fischer, and Karnit Flug.

Do note that the passage above can be taken either as evidence for or against restrictions on capital flows.

1 Typhoon Jim April 1, 2013 at 12:18 pm

I’m sure Cyprus would love some capital inflows right about now, but everyone would rather be off the sinking ship than on it.

2 JWatts April 1, 2013 at 12:37 pm

Cyprus may well be a special case. A small, island country in a relatively well regulated economic area.

3 Andreas Moser April 2, 2013 at 4:25 pm

But the government only controls half of the island. There is a big fat hole right in the northern side of Cyprus.

4 steve April 1, 2013 at 1:09 pm

To make capital controls “sort of” work, you need controls on all goods crossing the border. Otherwise, instead of sending cash, I just send a couple of diamond rings and convert them to cash. So the government looks for that, well a billionaire just sends a boatload of laundry detergent. It has a cash value. Nope, unless your idea of paradise is North Korea, capital and export/import controls are just shooting your self in the foot without even accomplishing the intended goal.

5 NL7 April 1, 2013 at 3:45 pm

I’m assuming you could probably also buy some villas in Cyprus, turning your Cypriot euros into real property, then outside Cyprus sell the property to somebody for a hefty sum. This assumes sufficient property stock in Cyprus (enough that you can convert most of your Cypriot euros into houses without early purchases raising the price of your later purchases) and sufficient foreign demand to vacation in Cyprus (so that you don’t have to devalue when you flip it). The government could probably control this process by watching for quick flips or for SILOs, but it illustrates how wide-ranging capital outflow controls have to be.

And if they start monitoring SILOs, then they’re limiting the tourist business; in principle, they wouldn’t want to stop people from buying homes and promoting them as vacation leases to foreign tourists (except that a SILO turns the property into cash). They could probably try to force the lease payments to be paid into Cyprus accounts, on pain of the lease being unenforceable to the lessee, but that takes more monitoring effort and in any event would not be necessary if the amount if just held in escrow by a trusted intermediary (e.g. in Zurich or the Caymans) in case of non-performance of the lease.

6 Derek April 1, 2013 at 1:36 pm

Let’s see. A kleptocrat government whose corruption and mismanagement creates a crisis then counts on the goodwill and law abiding nature of its citizenry to make a policy that is a sure sign of impending doom to work.

Didn’t Krugman come out in support of this type of policy?

7 mulp April 1, 2013 at 2:46 pm

Banks are governments?

Or are you arguing that banks are inherently corrupt and thus it is always government regulation that makes banks trustworthy, or corrupt and untrustworthy?

8 mulp April 1, 2013 at 2:44 pm

“Do note that the passage above can be taken either as evidence for or against restrictions on capital flows.”

It does argue for a single currency globally, which is what all the gold bugs argue for.

9 JWatts April 2, 2013 at 10:36 am

It does argue for a single currency globally, which is what all the gold bugs argue for.

I’m pretty sure the ‘gold bugs’ care more about gold being a non-fiat currency and not subject to direct government control. However, I’m sure a readily tradable global currency would be considered a bonus.

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