“Loose funds may sweep round the world disorganizing all steady business.
Nothing is more certain than that the movement of capital funds must be regulated”
Keynes, J.M.
Already Keynes warned against a free movement of capital. Those warnings were taken seriously by the international community and the IMF allowed in its articles the use of capital controls. The attitude towards those controls changed remarkably during the 1980`s when a general trend towards deregulation occurred. This trend peaked in an attempt to include the purpose of liberalizing capital movements in the Articles of Agreements of the IMF. Coinciding with the Asian Crisis, parts of the academic profession heavily opposed this idea and eventually, some of the fund`s representatives revised their general opposition against capital controls. Nonetheless, in big parts of the academic profession, capital controls carry a negative smack and the ultimate goal of free capital flows is promoted. With the financial crisis, however, capital controls came into vogue again. Recently, Brazil introduced a tax on foreign portfolio investment. Also at the G20 level, ways on how to regulate international capital flows are discussed.
Whether this should be seen as a desirable development or not, boils down to the question if capital controls are a useful instrument of economic policy? In general capital controls are any kind of policy that limits or redirects capital account transactions. So, the above mentioned question can be answered by looking at the situation of a fully liberalized capital account with its associated cost and benefits and see if state intervention in form of capital controls would be able to improve the situation. This discussion shall first rest on theoretical considerations and outline possible benefits of free capital flows. Thereafter, an important assumption, namely the Efficient Market Theorem, which allows for the prediction of those benefits, will be discussed. Subsequently, by dropping the EMT and introducing Keynesian uncertainty an alternative scenario is drawn and the effect of capital controls within this framework is examined. After this, some of the empirical research regarding the benefits of free capital flows will be examined and some of the areas where capital controls can play a beneficial role are introduced to the reader. Finally, the insights gained in the course of this paper will be summarized and an answer to the stated question will be given.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Are capital controls a useful instrument of economic policy?
- Are capital controls a useful instrument of economic policy?
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper examines the economic rationale behind capital controls, exploring whether they can be considered a useful tool for economic policy. It contrasts the theoretical benefits of free capital flows with the potential drawbacks and limitations of the Efficient Market Theorem (EMT). The paper investigates the role of uncertainty in financial markets and explores how capital controls might mitigate risks associated with capital flows. Finally, the paper discusses empirical research on the effects of capital controls and explores their potential role in promoting economic stability and development.
- The economic benefits and costs of free capital flows
- The validity of the Efficient Market Theorem (EMT) in financial markets
- The impact of uncertainty on financial markets and the role of capital controls
- Empirical evidence on the effects of capital controls
- The potential role of capital controls in promoting economic stability and development
Zusammenfassung der Kapitel (Chapter Summaries)
- Introduction: This chapter introduces the topic of capital controls and outlines the paper's objective. It draws attention to the historical debate surrounding capital controls, highlighting the contrasting views of economists and policymakers. The chapter sets the stage for the analysis by posing the central question: Are capital controls a useful instrument of economic policy?
- Are capital controls a useful instrument of economic policy?: This chapter delves into the theoretical arguments for and against capital controls. It explores the potential benefits of free capital flows, such as increased investment opportunities, improved risk management, and greater economic efficiency. The chapter also discusses the limitations of the EMT and the role of uncertainty in financial markets. It presents a Keynesian perspective on capital flows, emphasizing the destabilizing effects of market psychology and herding behavior. The chapter concludes by suggesting that capital controls can play a role in mitigating these risks and promoting economic stability.
Schlüsselwörter (Keywords)
The main keywords and focus topics of this paper include capital controls, economic policy, efficient market hypothesis, uncertainty, financial markets, liquidity preference, Keynesian economics, investment, risk, and economic development. The paper explores the theoretical and empirical implications of capital controls on economic outcomes, analyzing the potential benefits and costs of free capital flows, and evaluating the role of capital controls in mitigating market risks and promoting stability.
- Arbeit zitieren
- Daniel Detzer (Autor:in), 2010, Are capital controls a useful instrument of economic policy?, München, GRIN Verlag, https://www.grin.com/document/153652
