Bloomberg News

Capital Controls Should Be Standard Tool, Former Officials Say

October 25, 2011

Oct. 25 (Bloomberg) -- Policy makers should consider capital controls an essential tool rather than a last-resort measure for stemming money flows in and out of their countries, said a study by academics and former finance officials.

The policy prescription poses a “stark contrast” to the approach of the International Monetary Fund, which this year endorsed capital controls in limited circumstances, according to the authors, who include former Colombian Finance Minister Jose Antonio Ocampo. The report released today details alternative guidelines on when and how to use such measures.

Capital account regulations should “be seen as part of the arsenal that needs to be used to prevent and mitigate crises,” according to the study. “They should not be seen as solely temporary measures, but rather as permanent tools that can be used in a counter-cyclical way to smooth booms and busts.”

The IMF in April said policy makers should turn to capital controls in limited circumstances after countries strengthen banking systems and adopt economic measures such as building up reserves, tightening fiscal policies and lowering central bank interest rates.

Countries from Brazil to South Korea over the past year took measures to manage inflows of overseas capital that put upward pressure on their currencies, making exports less competitive and threatening to create asset price bubbles.

Should Europe’s debt crisis worsen, Brazil could face a flight of capital, Paulo Nogueira Batista, who represents Brazil and eight other countries at the IMF, said in an interview last week.

Task Force

The report was co-written by Boston University professor Kevin Gallagher and Stephany Griffith-Jones of Columbia University’s Initiative for Policy Dialogue. It summarizes the discussions of a task force on capital flows management that also includes former Reserve Bank of India Deputy Governor Rakesh Mohan.

The panel deems some capital controls more effective than others, preferring “quantity-based” limits such as curbs on some types of transactions, including on foreign borrowing below certain maturities.

Controls should be tailored to the openness of a country’s capital account, the panel said.

“The IMF report acts as if the set of nations it was talking to were nations with open capital accounts and floating exchange rates,” the authors said.

“But many developing countries deploy capital account regulations as a regular macro-prudential management technique and intervene heavily in foreign exchange markets,” they said.

--Editors: James L Tyson, Gail DeGeorge

To contact the reporter on this story: Sandrine Rastello in Washington at

To contact the editor responsible for this story: Christopher Wellisz at Washington at

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