Chapter

Interventions in Capital Markets

Joseph E. Stiglitz, José Antonio Ocampo, Shari Spiegel, Ricardo Ffrench-Davis and Deepak Nayyar

in Stability with Growth

Published in print August 2006 | ISBN: 9780199288144
Published online September 2006 | e-ISBN: 9780191603884 | DOI: http://dx.doi.org/10.1093/0199288143.003.0012

Series: Initiative for Policy Dialogue Series

 Interventions in Capital Markets

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Although there is now a general recognition that capital market liberalization failed to help developing countries achieve economic growth and stability, there are still a number of unresolved controversies, including the fundamental issue of what types of capital market interventions governments should undertake, and more centrally, whether there exist any interventions for which the benefits exceed the costs. Given the importance that capital account interventions can play in macroeconomic policy-making, this chapter analyzes alternative modes of regulations, including case studies of Chile, Colombia, and Malaysia. Though economists have a strong proclivity for price-based interventions (taxes and subsidies) over quantity-based interventions (administrative restrictions and controls), theoretical work in economics has shown that sometimes quantity-based restrictions can reduce risk more effectively than price interventions. In addition to direct forms of interventions, such as taxes and restrictions on inflows and outflows, interventions in capital markets can also take on a variety of indirect forms such as limiting banks’ short-term foreign borrowing or applying adverse tax or bankruptcy treatment to foreign-denominated borrowing. Though the regulations vary in their methods, they generally serve to segment (or separate) the domestic and foreign exchange markets. The chapter concludes with a number of arguments for and against the various modes of capital market intervention.

Keywords: capital market liberalization; Chile; Colombia; Malaysia; price-based interventions; quantity-based interventions; indirect interventions; market segmentation; soft controls

Chapter.  8748 words.  Illustrated.

Subjects: Economic Development and Growth

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