from Greenberg Center for Geoeconomic Studies

Doubts About Capital Controls

A CGS Capital Flows Comment

April 12, 2011

Report

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Capital Flows

Financial Markets

Monetary Policy

Overview

China's policy of holding down the value of its currency and monetary easing in the United States have led to large capital inflows into emerging economies, raising fears of currency appreciation and asset bubbles. In response, policymakers in emerging markets have resurrected the tool of capital controls to restrict inflows. Perhaps surprisingly, the international financial institutions, led by the IMF, have given their approval to such restrictions. In this Center for Geoeconomic Studies Capital Flows Comment, Francis E. Warnock challenges the assumptions underlying this new consensus in favor of controls. He argues that while controls may alter the composition of inflows, the overall amount is likely to be unchanged. Furthermore, in the same manner that one country's protectionism tends to spread, capital controls may lead to "flow diversion." Therefore, the bar for approving such restrictions should be high.