How effective are capital controls?

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.


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