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The Siren Song of Capital Controls

ITHACA, NEW YORK – Capital controls are back in vogue. Facing sharp currency appreciation and fearing asset-price booms fueled by hot money, countries such as Indonesia, Korea, and Taiwan have recently taken steps to limit inflows.

Nervous central bankers in many other emerging markets, including India, facing pressures from exporters hurt by rising exchange rates, are contemplating broader controls on capital inflows as well. Earlier this year, the International Monetary Fund came out in favor of capital controls.