John Overmyer

The Siren Song of Capital Controls

Capital controls are back in vogue, winning favor with several emerging-market governments and even an endorsement from the IMF. But capital controls remain a bad idea, and there is good reason to see inflows into emerging markets as an opportunity to strengthen domestic capital markets, rather than as a threat to financial stability.

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.

So, does the new fascination with capital controls hold up to scrutiny?

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