Ineffective Controls on Capital Inflows under Sophisticated Financial Markets

Bernardo S. de M. Carvalho and Márcio G. P. Garcia

in Financial Markets Volatility and Performance in Emerging Markets

Published by University of Chicago Press

Published in print March 2008 | ISBN: 9780226184951
Published online February 2013 | e-ISBN: 9780226185040 | DOI:
Ineffective Controls on Capital Inflows under Sophisticated Financial Markets

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This chapter explores the effects of ex ante capital controls. In contrast to ex post controls, ex ante controls should not jeopardize the emerging market country's reputation, as they are included in contracts with foreign investors prior to their investing. The chapter analyzes the effectiveness of inflow controls to limit short-term capital and modify the composition of financial inflows. Several authors have suggested controls on capital inflows as an economic policy measure for managing excessive capital inflows into emerging markets. In periods of greater liquidity and low international risk aversion, it is common for substantial financial flows to move into Latin America and Asia. The years from 2004 to 2006 were classic examples: “dollar weakness,” or expectations of greater depreciation of the United States dollar due to forecasts that the U.S. current account deficit had to be reversed, together with low base interest rates in developed countries.

Keywords: capital controls; emerging markets; foreign investors; capital inflows; short-term capital; financial inflows; depreciation; dollar; current account deficit

Chapter.  26550 words.  Illustrated.

Subjects: Macroeconomics and Monetary Economics

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