Capital Controls

The global financial crises have had severe impact on various financial markets and the world economies at large. At various points in time during economic recessions, the confidence of the global investors is always sapped while most investors panic for safety. The past ten years especially have witnessed intense governmental and intergovernmental interventions in the form of financial bailouts, regulatory reforms, coordinated stimulus and responses from the central banks to address liquidity problems caused by the global financial crisis.

With the ever-growing populism around protectionism, the debates between globalism and capital control has become more intense. Considering the current issues bordering on tighter immigration, closing of boarders and higher tariffs for good produced in overseas by some countries, the coming years will become more interesting and difficult at the same time for many governments, countries, institutions and multinational companies. So, are we witnessing another global economic crisis? This paper decides to look into the effects, the widespread and the impacts of country governance on world economies at large.

The notion of open capital accounts has greatly evolved from unregulated liberalisations in the ‘80s, to now warranting management through capital controls and macroprudential measures. The risks of procyclical cross-border capital movements are amplified by global push factors, requiring their regulation more than ever. Changing global factors intermingling with the domestic economy result in highly uncertain foreign capital movements, and demand constant modulation of responses and surveillance of cross-border flows. This also requires financial sector resilience from such capital volatilities, to benefit from cross-border flows while protecting countries from destabilising volatilities. Malaysia’s capital account illustrates this since the ‘80s, with proactive capital account management and weathering the Asian Financial Crisis and Global Financial Crisis. The analysis of Malaysia’s strategy highlights the successes of using strong capital controls in the Asian crisis, their flexible liberalisations, and the transformation of its financial sector since 1998. It also raises the issue of reincorporating capital controls into the country’s toolkit, along with better surveillance, to address concerning capital flows before and after the Global Financial Crisis. The country continues to teach important lessons for EMEs on the powerful role of macroprudence, and reaping benefits of cross-border finance through proactive capital management.

The article analyses capital controls (CC) in South Africa in light of the historically and geographically specific social relations of production. It highlights the role that CC have historically played in reproducing particular forms of capital accumulation, and sheds light on the CC currently implemented by the state. The analysis draws upon quantitative data from the national accounts, descriptive data on CC from policy documents, and interviews conducted during a period of extensive fieldwork. The article makes three main arguments. First, CC have played a key role in facilitating the reproduction of essential capitalist social forms, namely the state and money, and have been instrumental in the management of class relations. Second, the concrete forms that CC have taken are inseparable from the historical-geographical specificity of accumulation and the uneven unfolding of crises and social class struggles. Third, working classes have had an active (though indirect) role in shaping CC policies.

This white paper examines the current state of debate about – and evidence for – the links between cash, crime, and terrorism. Drawing from IMTFI’s accumulated expertise on monetary technologies, from cash to digital, it examines a range of institutional, legal, scholarly, policy, news media, and other sources to situate and understand this claim. What studies and data underlie the critical policy move of proposing to eliminate cash to address crime? Key findings include the importance of the interplay between multiple payment tools and jurisdictions. People use diverse payment methods together, and the movement of value across jurisdictions is subject to different regulatory environments and payment cultures. Targeting cash in isolation does not take into account this interplay, and risks displacing criminal activities involving cash to other tools and jurisdictions. Multiple methods of interdiction are therefore needed to address money laundering and terrorist financing.

John Maynard Keynes was certainly the most famous and arguably the greatest political economist of the twentieth century. His seminal publication, The General Theory of Employment Interest and Money, published in 1936, changed economics irrevocably. Unfortunately, Keynes was not well-served by his followers, and much of his bold vision is missing from standard textbook treatments of his work. This essay sets the record straight by having four key objectives. First, as context, it provides a biographical sketch of Keynes achievements and the ‘interesting’ times which he experienced, the single most important event being the Great Inter-War Depression. Second, as further context, it introduces the essentials of the classical orthodoxy, the pre-Keynesian macro-economic theory of how economic society worked, and its conservative policy agenda, from which Keynes departed. Third, the core of the essay, it faithfully explains the key concepts and ideas of his new workable classification in which effective demand was the driving force, and the many-layered policy programme known as the Middle-Way, which he fashioned over time to meet the challenges posed by the Great Depression, World War 2 and the post-war world. Lastly, it sets-out the reasons why Keynes can be described as one of the greats of political economy.

This paper offers an original survey of the Malaysian crisis and the effects of the consequent imposition of capital controls by authorities in September 1998 and of their subsequent relaxation in February and September 1999. We identify Malaysia’s unique strengths and weaknesses before the crisis, appreciate the differential timing and nature of the Malaysian crisis vis-à-vis the other neighbouring crisis countries, and distinguish carefully between the restrictive and incentive components of the imposed controls. Against this backdrop, we analyse both the “level” (first-order) effects and the “volatility” (second-order) effects of controls on key macroeconomic, banking and financial market variables. On the level effects, we found the Malaysian recovery (starting late 1998) to be at least as quick, strong and lasting as that of the other crisis countries, and discovered important channels of influence from controls to interest rates (which were lowered) and stock markets (which recovered dramatically). These results on the effectiveness of controls are consistent with earlier studies by Edison & Reinhart (2001) and Kaplan & Rodrik (2001). However, due to the longer time period used here, a stronger restatement of their conclusions is now possible. We study the secondorder effects of controls by introducing a Capital Asset Pricing Model (CAPM)-based portfolio choice model and show how controls, especially when they work as an asymmetric tax on short-term investment, reduce both the volume of speculative flows and the associated interest rate volatility. To test these theoretical results, we set up a standard Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model of interest rate and stock market volatility where capital control dummies are introduced in the variance equation. Our model is an improvement over earlier studies in two ways: a more sophisticated capital control dummy was used to take account of the relaxation of controls in February 1999; and we dealt with the problem of endogeneity in the mean equation by using regressors that are not Granger-caused by the regressand (Malaysian interest rate and stock returns). The model shows that controls did limit interest rate volatility in line with the theoretical prior, but worsened stock market volatility. The latter result lends credence to the view that controls shifted the burden of adjustment from quantity to prices.

This paper analyzes one of modern macroeconomics’ most well-known conundrum, the Feldstein-Horioka puzzle. In this paper, the author compares the exercise Feldstein and Horioka performed in the early 1980s with the results achieved using updated data (1980-2018) and two different econometric approaches, cross sectional and panel data. The Question we are looking to answer is: would Feldstein and Horioka’s high coefficients and R-squares between domestic savings and investments still hold today?

Capital control is used as policy toolkit for safeguarding domestic economy from the volatility of capital flows. However, the effect of capital control is rather far fetched as the signaling effect of capital control can moderate investor's outlook about domestic economy and thereby outweighs the intended effect. The spillover effect, on the other hand, modulates the capital flows to other countries when one country increases capital account restrictions. Further, the effect of capital control can have varying impact on capital inflows to different sectors as recent studies indicate heterogeneity in the drivers and nature of capital inflows to different institutional sectors. With the background, the paper analyzes the heterogeneous direct and spillover effect of capital control on gross capital flows across three major institutional sectors namely public, banks and corporate. The paper validates the possible heterogeneity in the effect of capital control on the capital inflows to these institutional sectors using spatial econometric models. The paper observes that the direct effect of capital control moderates portfolio inflows to public sector whereas the effect is insignificant on portfolio inflows to banks and corporate sector. Further, the paper observes that the spillover effect of capital control is broad-based i.e. equally prevalent on all sectors. The paper explains the heterogeneity in the capital control effects by introducing signaling effect in a portfolio choice model. The paper argues that the heterogeneous direct effect is driven by private signals of capital control received by the investors about the state of economy whereas the spillover effect of capital control is mainly driven by the hedging and search for better returns. The paper extends the existing literature of capital controls by reviewing the sectoral heterogeneity in the capital flows.

This paper offers an original survey of the Malaysian crisis and the effects of the consequent imposition of capital controls by authorities in September 1998 and of their subsequent relaxation in February and September 1999. We identify Malaysia’s unique strengths and weaknesses before the crisis, appreciate the differential timing and nature of the Malaysian crisis vis-à-vis the other neighbouring crisis countries, and distinguish carefully between the restrictive and incentive components of the imposed controls. Against this backdrop, we analyse both the “level” (first-order) effects and the “volatility” (second-order) effects of controls on key macroeconomic, banking and financial market variables. On the level effects, we found the Malaysian recovery (starting late 1998) to be at least as quick, strong and lasting as that of the other crisis countries, and discovered important channels of influence from controls to interest rates (which were lowered) and stock markets (which re...

Recent political economy scholarship has interpreted the recent resurgence of capital controls across the Global South as attempts by some developing countries to preserve their policy space to pursue heterodox economic policies. This article critically engages with this literature and argues for the need to study capital controls in light of the social constitution and the class character of the capitalist state, money, and private capital flows. This argument is substantiated through a class analysis of the deployment of capital controls in Brazil from 1945 to 2014, which emphasizes the crucial role that capital controls have historically played in the reproduction of capitalist social relations and particular forms of class rule in Brazil.

We study how capital controls and domestic macroprudential policy tame credit supply booms, either directly or by enhancing the local bank-lending channel of monetary policy. We exploit credit registry data and the introduction of capital controls on foreign exchange (FX) debt inflows and increase of reserve requirements on domestic bank deposits in Colombia during a boom. We find that capital controls strengthen the bank-lending channel. Increasing the local monetary policy rate widens the interest rate differential with the U.S.; hence, relatively more FX-indebted banks carry-trade cheap FX-funds with expensive peso lending, especially towards riskier firms. Capital controls tax FX-debt and break the carry-trade. Differently, raising reserve requirements on domestic deposits directly reduces credit supply, particularly for riskier firms, rather than enhancing the bank-lending channel. Importantly, banks differentially finance credit with domestic vis-à-vis FX-financing; hence, capital controls and domestic macroprudential policy complementarily mitigate the credit boom and related bank risk-taking.

The aim of the article is to analyze the changing position of the state in the capitalist world economy form the perspective of Karl Polanyi’s political theory. The main thesis of the article is that the position of the state largely depends on the character of rules constituting global political economy. Three world regimes were singled out (gold standard, Bretton Woods system, and hyperglobalization), and the position of the state within each system was analyzed. If we agree with Robert Cox that each world order is a product of ideas, institutions and power relations, then we may expect the institutional structure of the world economy to evolve following the changes in the underlying constellation of ideas and social forces.

This article provides a critical interrogation of the Brazilian tax on foreign exchange derivatives deployed between 2011 and 2013. It analyses the drivers of the policy-making process that led to implementation of the measure, locates it within the broader policy response regarding the management of cross-border capital flows and speculative finance, and assesses its political economy significance in light of class dynamics. The author makes three arguments. First, this innovative policy tool must be interpreted in terms of the emergence of a specific form of state power allowing for the continuation of finance-led strategies of accumulation, while mitigating some of their worst consequences. Second, this form of state power internalizes the subordinate positionality of Brazil in the global financial and monetary system. Third, while financialization processes have eroded the efficiency of a number of policy tools, this policy experiment demonstrates the possibility of regulating complex financial markets, provided that appropriate resources are dedicated to the task, and that there is the political will to do so. The article concludes by discussing theoretical implications, for how to theorize state and financialization, as well as political implications.

The recent global financial crisis sparked renewed debates, both within academia and policy-making circles, about regulating highly mobile cross-border money-capital flows. A particular type of policy tool has received considerable attention: capital controls (CC). Within mainstream economics and policy-oriented circles (including policy-makers in central banks, finance ministries, and international organisations such as the IMF and the G20) there has been a growing recognition that unregulated cross-border money-capital flows can considerably disrupt capital accumulation, and debates have accordingly focused on the potential role and effectiveness of temporary CC in limiting the destabilising potential of those flows, while maintaining a long-term commitment to an open capital-account and free capital mobility. 1 By contrast, the Left (including organised labour, progressive economists, and civil society organisations) has been largely critical of capital-account liberalisation, and has denounced its detrimental effects in terms of constraining policy options for development and long-term industrial development. 2 Consequently, there has been a growing consensus on the Left that CC can play a key role in designing more progressive and development-friendly forms of financial governance, and in empowering labour vis-à-vis capital. While those debates are welcome, there has been remarkably little research on the role that those measures have historically played in the specific national contexts where they were implemented, particularly with regards to prevailing social relations of production. There has also been very few attempts at understanding in class terms the actual role of the diversity of CC currently in place across the Global South. This is particularly problematic, given that CC are not ready-made, neutral, technical measures, which fulfil similar objectives irrespective of where they are implemented. By contrast, CC have historically played an important role in broader class-based strategies and in sustaining particular forms of capital accumulation. 3 In fact, the lack of critical analyses of CC sensitive to class dynamics is quite surprising, given the now widespread view on the Left that curbing the power of capital over labour will involve CC. My contention is that if progressive forms of CC are to be designed in the future, it is necessary in the first place to understand the role and function that CC have played in particular national contexts, within the broader role of the capitalist state in the antagonistic and crisis-ridden process of capital valorisation, and to uncover the class dynamics associated with them. This is especially important in those countries which have a

“Restrictions on the Free Movement of Capital in contemporary EU law”, (Nomiki Bibliothiki, 2022) (480 pages).
Το παρόν βιβλίο πραγματεύεται τη νομική φύση των περιορισμών στην κίνηση κεφαλαίων, περιλαμβανομένων και των αποκαλούμενων «capital controls», σε ενωσιακό επίπεδο. Η Ευρωπαϊκή Ένωση, μέσω μιας μακροχρόνιας και επίμονης διαδικασίας, χάραξε -δια της ενωσιακής νομοθεσίας και νομολογίας- μια ελεγχόμενη πορεία απελευθέρωσης των κεφαλαιακών ροών, αντιμετωπίζοντας τις όποιες σοβαρές προκλήσεις εμπεριείχε εξαρχής το εν λόγω εγχείρημα. Τούτη η προσπάθεια σταδιακής εξέλιξης της ελεύθερης κυκλοφορίας των κεφαλαίων, της νεότερης και ευρύτερης εκ των τεσσάρων θεμελιωδών ελευθεριών, κατέληξε στη ριζική αναμόρφωση του νομικού καθεστώτος της στον ευρωπαϊκό χώρο. Εξετάζοντας τα ιδιαίτερα χαρακτηριστικά των κεφαλαιακών περιορισμών, αλλά και τις πρόσφατες περιπτώσεις εφαρμογής τους -εν καιρώ κρίσης- στην Ελλάδα και την Κύπρο, διαπιστώνει κανείς ότι η επιβολή τους δεν αποτελεί τη συνήθη πρακτική ή μια εύκολη διέξοδο από νομικής άποψης για τα κράτη μέλη. Καθίσταται σαφές ότι οι φραγμοί επί της ελεύθερης κυκλοφορίας προκαλούν προβλήματα που επηρεάζουν τόσο την ορθή λειτουργία της εσωτερικής αγοράς, όσο και, κατ’ ακολουθίαν, την ίδια την Ένωση. Το γεγονός αυτό δεν μειώνει τον ιδιάζοντα ρόλο και τη χρησιμότητα των κεφαλαιακών περιορισμών σε κρίσιμες καταστάσεις, εφόσον δύνανται κατ’ εξαίρεση να δικαιολογηθούν υπό ορισμένες συνθήκες, όπως επιτάσσει το ενωσιακό δίκαιο, παρέχοντας την ευχέρεια στο κράτος μέλος να παρεκκλίνει νομίμως από τους σχετικούς απαγορευτικούς κανόνες του πρωτογενούς ενωσιακού δικαίου. Σε κάθε περίπτωση, αναδεικνύονται νέες πτυχές ως προς το νομικό καθεστώς των capital controls στο πλαίσιο του σύγχρονου ενωσιακού δικαίου, ενώ δια της ενδελεχούς ανάλυσης δίδεται μια ακριβής και συνολική εικόνα ως προς την εν γένει καθιέρωση και λειτουργία της ελεύθερης κυκλοφορίας των κεφαλαίων.

The causes and consequences of international capital mobility have been widely discussed in the fields of International Relations (IR) and International Political Economy (IPE), particularly in the aftermath of recurring financial crises over the past twenty-five years or so. International capital mobility refers to the ability of private capital to move across territorial borders in search for higher yields. A key question has been the extent to which international capital mobility-greatly enhanced by technological advances in financial trading systems, widespread financial deregulation and liberalisation, the global integration of financial markets, and financial innovation since the 1980s-has caused an erosion of state power. The issue is particularly pressing for developing and emerging economies, which despite growing participation and integration into the financial world market, have remained extremely vulnerable to highly volatile cross-border flows of financial capital, as recent crises in developing countries across the income spectrum have shown. Much of the IR and IPE thinking on the matter has been profoundly shaped by three foundational arguments, which I review in this short article. I am particularly concerned here with the extent to which those arguments allow making sense of the policies that were recently implemented in a number of developing and emerging economies in order to manage cross-border finance. Indeed, in the context of the recent global financial crisis, countries across the developing world deployed measures that aimed at taming the destabilizing effects of sharp swings of unregulated financial capital. For instance, developing economies such as Brazil, South Korea, Indonesia, Costa Rica, Uruguay, the Philippines, Peru, Taiwan, Colombia, and Thailand put in place a variety of capital controls (Grabel 2015).
https://www.e-ir.info/2019/03/09/class-matters-global-capital-mobility-and-state-power-in-emerging-economies/

Este artigo objetiva discutir criticamente a proposta de Pérsio Arida de adoção da plena conversibilidade do real no Brasil. sustenta que a conversibilidade da moeda resultaria em menores taxas de juros domésticas no país, assim como menores taxas nos títulos externos brasileiros. Além disso, a conversibilidade do real iria estabilizar os fluxos de capitais, assim como diminuir a volatilidade da taxa de câmbio no Brasil. Nós argumentamos que esta proposta não conduz necessariamente nem a uma menor volatilidade da taxa de câmbio, nem a menores taxas de juros. Ademais, concluímos o artigo apresentando algumas alternativas em termos de controles de capitais no Brasil.

There is extensive theoretical literature related to economies characterized by the existence of foreign exchange controls. A common feature of these papers is that such policy is imposed exogenously. This extended essay presents a simple model in which the imposition of foreign exchange controls by the government arises from equilibrium conditions. In the context of a choicetheoretic cash-in-advance general equilibrium, a set of assumptions are made for the economy to resemble the prevailing conditions in Argentina at the time restrictions on purchases of foreign exchange were put into practice.

From the United State’s Interest Equalization Tax of 1963, the Chilean encaje of the 1990s, the restrictions imposed by Malaysia in September 1998, to instituted controls in Iceland in 2008 and Cyprus in 2013, capital controls have featured variously in historical epochs, stimulating debates on its applicability and constitution across various quarters. This write up lucubrates on the concept of capital controls, with focus on developing and emerging economies, touching on
rationale and demerits, as well as a look on empirical evidence in evaluation of impact assessment on these economies. Controls of movement of capital across borders remains a controversial issue in international policy decisions, and is what this paper seeks to explore in the remaining sections.

The 2008 financial crisis has emphasized the importance of macro financial linkages. In the financial sector, attention is now focusing on macro prudential regulations that are geared toward the stability of the financial system as a whole. In the macro arena, the recognition that price stability was not sufficient to guarantee macroeconomic stability and that financial imbalances developed despite low inflation and small output gaps has highlighted the need for additional tools (macro prudential policies) to complement monetary policy in countercyclical management. Emerging markets (EMs) face different conditions and have key structural features that can have a bearing on the relevance and efficacy of policy measures. Drawing on Canuto and Ghosh (2013), 1 this note discusses the challenges of dealing with macro financial linkages and explores the policy toolkit available for dealing with systemic risks, particularly in the context of EMs. The 2008 financial crisis has highlighted the challenges associated with global financial integration and emphasized the importance of macro financial linkages. Specifically, the crisis has shown how the real sector (business cycles) can interact with and be amplified by the financial sector, resulting in high procyclicality and a buildup of systemic risk in the financial sector that manifests during economic downturns. Although boom-bust cycles in asset prices and credit were observed prior to the recent global crisis, they did not seriously challenge the prevailing paradigm. In the macro arena, the general view was that keeping monetary policy focused on price and output stability would deliver the best feasible outcome (Bernanke and Gertler 1999, 2001), although some proponents argued in favor of "leaning against the wind" (Blanchard 2000; Borio and White 2004). In the financial sector, prudential policies in most economies focused narrowly on the soundness of individual financial institutions. Policies in both the macroeconomic and financial sector arenas are now being debated and reviewed (see Blanchard, Dell'Ariccia, and Mauro [2010, 2013] for overviews). In the

This paper improves upon the recently developed literature on exits from fixed exchange rate regimes in three ways: 1) It allows for two indicators for post-exit macroeconomic conditions, the change in the excange rate and the change in the output gap; 2) it tests whether the distinction between orderly and disorderly exit is statistically justified, and concludes that it is not; 3) it deals with the sample selection problem. The results, subject to extensive sensitivity analysis, suggest that post-exits are better when depegging occur in good macroeconomic conditions -an unnatural move for most policymakers -when world interest rates decline and in the presence of capital controls. Importantly, "good" macroeconomic policies do not seem to help with post-exit performance.

O monitoramento da Confederação Nacional da Indústria (CNI) apontou que o Brasil aderiu, desde o início de 2020, a mais três novos instrumentos jurídicos da Organização para a Cooperação e Desenvolvimento Econômico (OCDE). Dentre os 254 instrumentos geridos pela OCDE, o país já é signatário de 84 deles (33%).

Dentre os mais diversos tratados, a entrada do Brasil na OCDE passa pela adesão a um dos instrumentos normativos mais relevantes (porém, controverso) da entidade: o Código de Liberalização do Movimento de Capitais. Pouco se fala na mídia especializada sobre esse tema. Acredito que a alta complexidade jurídica do Código torne obscuro seu conteúdo, que é, na verdade, bastante prático. O tratado intensifica o processo de integração financeira do país e, especialmente, constrange sua capacidade de estabelecer controle de capitais.

Em tempos de crise da COVID-19, cabe uma reflexão mais detida sobre a adequação desse tratado aos desafios da economia global. Em Nota Técnica do NEPEI, do Instituto de Relações Internacionais da Universidade de São Paulo (IRI-USP), procurei explorar os constrangimentos jurídicos e econômicos postos ao país.

Afinal, o Brasil deve aderir ao Código? Se sim, o que precisa para assegurar a boa gestão de suas eventuais obrigações jurídicas relacionadas ao tratado?

This article compares the euro crisis to the Great Depression. The challenge in both is to depreciate the real exchange rate of crisis countries – regain ‘competitiveness’ – without depreciating the nominal exchange rate. The monetary arrangements in the Great Depression elicited zeal against nominal depreciation similar to that in the eurozone today. To anticipate the conclusion: recovery in the Great Depression depended upon nominal depreciation or imposition of currency controls. Similar heterodoxy is in store for the eurozone.