One of the main arguments against capital controls is that, though they may be in an individual country’s interest, they could be multilaterally destructive in the same way that tariffs on goods can be destructive.
A particular concern is that a country might impose controls to avoid necessary macroeconomic and external adjustment, in turn shifting the burden of adjustment onto other countries.
A proliferation of capital controls across countries, moreover, may not only undercut warranted adjustments of exchange rates and imbalances across the globe, it may lead in the logical extreme to a situation of financial autarky or isolation in the same way that trade wars can shrink the volume of world trade, seriously damaging global welfare.
So should multilateral considerations trump national interests?
Possible rationales for controls
To begin, it is worth reviewing some of the reasons why countries may wish to impose controls.
Filed under: Advanced Economies, Africa, Asia, Economic research, Emerging Markets, Employment, Europe, Finance, Global Governance, Globalization, growth, Inequality, International Monetary Fund, Investment, Latin America, Low-income countries, Middle East, Multilateral Cooperation, Politics, Public debt | Tagged: autarky, borrowing, capital controls, capital flows, creditors, currency, debtors, exploitation of market power, externality, Ghosh, iMFdirect blog, Jonathan Ostry, Korinek, learning-by-doing, multilateral, mutual deflection, optimal tariff, red flag, risk, tariffs, trade, undervaluation | 3 Comments »