Great Depression recovery: The role of capital controls

Kris James Mitchener , Kirsten Wandschneider 18 August 2014

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The use of capital controls as a policy tool – especially as a stopgap to ward off financial crises – is controversial. For example, in 1998, Malaysia was castigated by policymakers and financial markets for imposing capital controls in response to the East Asian financial crisis. In 2010, however, the IMF revised its stand against capital controls, recognising that sudden capital surges can pose risks for some countries, and acknowledging that controls on capital inflows may be part of a toolkit that countries use to ward off financial crises (Ostry et al. 2010).

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Topics:  Economic history Exchange rates International finance Monetary policy

Tags:  exchange rates, financial crises, capital controls, gold standard, East Asian financial crisis, Great Depression

Do capital controls deflect capital flows?

Paolo Giordani, Michele Ruta, Hans Weisfeld, Ling Zhu 23 June 2014

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The size and volatility of capital flows to developing countries have increased significantly in recent years (Figure 1), leading many economists to argue that national policies and multilateral institutions are needed to govern these flows (Forbes and Klein 2013, Blanchard and Ostry 2012). The IMF itself has reviewed its position on the liberalisation and management of capital flows, while recognising that “much further work remains to be done to improve policy coordination in the financial sector” (IMF 2012, p. 28).

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Topics:  International finance

Tags:  China, capital flows, spillovers, South Africa, capital controls, Brazil, Capital inflows, international capital flows

Capital controls in the 21st century

Barry Eichengreen, Andrew K Rose 05 June 2014

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Capital controls are back. The IMF (2012) has softened its earlier opposition to their use. Some emerging markets – Brazil, for example – have made renewed use of controls since the global financial crisis of 2008–2009. A number of distinguished economists have now suggested tightening and loosening controls in response to a range of economic and financial issues and problems. While the rationales vary, they tend to have in common the assumption that first-best policies are unavailable and that capital controls can be thought of as a second-best intervention.

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Topics:  International finance

Tags:  IMF, capital flows, global financial crisis, capital controls, capital, Macroprudential policy

For a few dollars more: Reserves and growth in times of crises

Matthieu Bussière, Gong Cheng, Menzie D. Chinn , Noëmie Lisack 16 March 2014

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In the decade preceding the 2008 global financial crisis (GFC), emerging market economies accumulated large stocks of international reserves (see Figure 1). The unprecedented pace of reserve accumulation was at least partly a response to the lessons drawn from previous financial crises, which predominantly affected emerging markets. Most research on emerging-market crises suggests that countries with an insufficient level of reserves, measured against appropriately chosen benchmarks, suffered more from crises in the 1990s.1

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Topics:  International finance

Tags:  financial crises, international reserves, capital controls

Policymaking in crises: Pick your poison

Kristin Forbes, Michael W Klein 24 December 2013

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In 2010, the Brazilian finance minister Guido Mantenga declared a ‘currency war’ because of the harmful effects of the strengthening of the real. He blamed the currency’s appreciation on easy money in advanced countries, and to a lesser extent on reserve accumulation in some emerging markets. More recently, concerns were raised by slides in the values of the Indian rupee – which lost 18% of its value against the dollar between February and August – and by the fall in the value of the Indonesian rupiah – which has lost almost a quarter of its value against the US dollar in 2013.

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Topics:  Exchange rates Macroeconomic policy

Tags:  exchange rates, foreign exchange reserves, India, Indonesia, global financial crisis, capital controls, Brazil, currency war

Tapering talk: The impact of expectations of reduced Federal Reserve security purchases on emerging markets

Barry Eichengreen, Poonam Gupta 19 December 2013

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In May 2013, Federal Reserve officials first began to talk of the possibility of the US central bank tapering its securities purchases from $85 billion a month to something lower. A milestone to which many observers point is 22 May 2013, when Chairman Bernanke raised the possibility of tapering in his testimony to Congress. This ‘tapering talk’ had a sharp negative impact on economic and financial conditions in emerging markets.

Three aspects of that impact are noteworthy:

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Topics:  Exchange rates Monetary policy

Tags:  exchange rates, monetary policy, Federal Reserve, emerging markets, capital controls, Macroprudential policies, Capital inflows, currency war, tapering

Capital controls and the resolution of failed cross-border banks: The case of Iceland

Friðrik Már Baldursson, Richard Portes 12 November 2013

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A large amount of carry trade was drawn to Iceland in the boom leading up to the crisis of early October 2008 (Danielsson and Arnason 2011, Baldursson and Portes 2013a). As pressure mounted on the Icelandic banks, investors increasingly chose to exit the krona, which depreciated by 25% during the week before the banks collapsed. As the banks went down, the krona depreciated even further.

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Topics:  Europe's nations and regions Global crisis

Tags:  Iceland, capital controls, cross-border banks

Independent monetary policies, synchronised outcomes

Espen Henriksen, Finn Kydland, Roman Šustek 02 October 2013

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The recession in the Eurozone has given new life to optimal-currency-area thinking. The argument goes that the disadvantages of a single currency come from the loss of flexibility and ability to use monetary policy to respond to “asymmetric shocks” (Krugman and Obstfeld 2009). The often-unarticulated presumption is that countries with independent monetary policies would make different policy decisions as long as contemporaneous shocks to output and employment were asymmetric.

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Topics:  Exchange rates Monetary policy

Tags:  inflation, monetary policy, EMU, Central Banks, capital controls, exchange-rate policy

Is there a dilemma with the Trilemma?

Michael W Klein, Jay C. Shambaugh 27 September 2013

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In the Handbook of Safeguarding Global Financial Stability, the chapter “Capital Mobility and Exchange Rate Regimes” begins “Forced to state all the insights of international macroeconomics while standing on one leg, one could do worse than raise a foot off the ground and say something like:

  • ‘Governments face the policy trilemma – the rest is commentary.’”

Admittedly, that entry was written by one of us.

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Topics:  Exchange rates Monetary policy

Tags:  monetary policy, global crisis, capital controls, exchange-rate policy

Dilemma not Trilemma: The global financial cycle and monetary policy independence

Hélène Rey 31 August 2013

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Looking at the evolution of financial integration over the past half‐century in the world economy, one might conclude that financial openness is an irresistible long-run trend, hailed by policymakers and academic economists alike. Both emerging markets and advanced economies have increasingly opened their borders to financial flows. Yet in a financially integrated world, fixed exchange rates export the monetary policy of the centre country to the periphery. It is impossible to have at the same time free capital mobility, fixed exchange rates and independent monetary policy.

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Topics:  International finance Monetary policy

Tags:  capital controls, macro-prudential policy, Global financial cycle, VIX

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