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The case against capital controls: financial flows, crises, and the flip side of the free-trade argument

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  • Hartwell, Christopher A.

Abstract

Critics of globalization view the free flow of capital as economically destabilizing and advocate capital controls for four main reasons: controls are intended to guard against volatility, prevent financial contagion, enable infant financial industries to develop in domestic markets, and be an effective measure of last resort that gives governments room in which to breathe while they pursue needed reforms. However, the empirical record does not support the beliefs of proponents of capital controls. Developing countries would be better served by addressing the real causes of financial turmoil. Specifically, countries should fix their unsound banking systems by opening their financial sectors to foreign competition, eliminate government guarantees against bank failures, create independent central banks, and move away from pegged exchange rates and toward floating or fully fixed exchange-rate regimes.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40263.

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Date of creation: 14 Jun 2001
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Handle: RePEc:pra:mprapa:40263

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Related research

Keywords: capital controls; Asian financial crisis;

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Cited by:
  1. Hartwell, Christopher A., 2011. "All That’s Old is New Again: Capital Controls and the Macroeconomic Determinants of Entrepreneurship in Emerging Markets," MPRA Paper 40257, University Library of Munich, Germany.
  2. Kinga Z. Elo, 2007. "The Effect of Capital Controlson Foreign Direct Investment Decisions Under Country Risk with Intangible Assets," IMF Working Papers 07/79, International Monetary Fund.
  3. Andrew van Hulten & Michael Webber, 2010. "Do developing countries need 'good' institutions and policies and deep financial markets to benefit from capital account liberalization?," Journal of Economic Geography, Oxford University Press, Oxford University Press, vol. 10(2), pages 283-319, March.

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