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Controls on Capital Flows and the Tobin Tax


  • Paul De Grauwe


The financial crises of the 1990s have given a new impetus to proposals aimed at controlling international capital movements. Well-known economists came out in favour of such controls, giving (some of these) capital controls a new respectability. In this paper we want to evaluate these proposals. In order to do so, it is important to distinguish between the different objectives that are pursued by those who propose capital controls. These objectives are very diverse. The most important ones are the following: A reduction of "excessive" exchange rate variability. A source of revenue for worthwhile international projects (e.g. development aid). Giving the monetary authorities more autonomy in setting domestic interest rates. Stabilisation of an emerging financial crisis due to large scale capital outflows. Preventing excessive capital inflows when countries liberalise their domestic markets. Some proposals for controlling capital movements have been aimed at several of these objectives. The best-known proposal in this category is the Tobin-tax. Other proposals have more narrowly defined objectives. In this paper we analyse some of these proposals and evaluate their effectiveness in achieving their stated objectives.

Suggested Citation

  • Paul De Grauwe, 2000. "Controls on Capital Flows and the Tobin Tax," Working Papers Department of Economics ces0002, KU Leuven, Faculty of Economics and Business, Department of Economics.
  • Handle: RePEc:ete:ceswps:ces0002

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