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Capital controls and exchange rates

This was the topic of the RBI/ADB conference in Mumbai. No particular surprises. The consensus is that capital controls affect the composition of flows, but not their volume, and even the IMF, represented by Jonathan Ostry, suggested that capital controls should be part of the tool kit used by central banks. Also, some skepticism on the efficiency of short term (or episodical controls, such as the ones used by Brazil) was raised. Of course there are still differences on what circumstances capital controls are actually necessary.

Most of the discussion was related to the use of capital controls to reduce the risk of appreciation, since in the last decade developing countries have had to deal with inflows and a depreciating dollar. Note, however, that capital controls were not thought when originally defended by Keynes and White at Bretton Woods to be necessary for reducing appreciating tendencies, but to limit capital flight (and avoid and external crisis) and provide monetary autonomy (Impossible Trinity or Trilemma).

Further, in historical perspective, exchange controls (capital controls on quantities not prices) have been used as an instrument for industrial policy, to determine that the use of dollars is prioritized for capital equipment imports particularly in the periphery. In that sense their use is in fact an essential an permanent tool in the developing economy set of instruments, and that's why signing FTAs or BITs that reduce the ability to deploy capital controls is dangerous.

PS: On the long standing issues related to capital controls and exchange rate regimes see this paper.


  1. exports are essencial to acquire divisas that are used to buy equipments that are needed for big investments. the expensive dollar make them even more expensive, that doesn't mean that its bad for your currency to be depreciated, since its not worth destroying industries because of such equipments being more expensive, since its no good to make such investments if your national industry is depressed

    1. Yes depreciation, if you can do it while other countries don't is fine. But note that it's more important for protection than as a stimulus for exports, since income elasticities are not that large for most Latin American countries. We should depend more on domestic markets anyway, given the current international situation and the type of integration with China that is over-reliant on commodity exports.


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