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The Myth of Financial Protectionism: The New (and old) Economics of Capital Controls

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  • Kevin Gallagher

Abstract

Unstable global capital flows to developing countries have been characteristic of the world economy in the wake of the global financial crisis. The nations that have deployed capital controls to mitigate the negative effects of such flows have been branded as “protectionist” by some. This paper argues that such claims are unfounded. There is a longstanding strand of modern economic theory that dates back to Keynes and Prebisch and continues to this day that sees the use of capital controls as essential for macroeconomic stability and in order to deploy an independent monetary policy. In a most recent development, a “new welfare economics” of capital controls has arisen within the mainstream that sees controls as measures to correct for market failures due to imperfect information, contagion, uncertainty and beyond. Taken as a whole then, rather than the “new protectionism,” capital controls could be seen as the “new correctionism” that re-justifies a tool that has long been recognized to promote stability and growth in developing countries.

Suggested Citation

  • Kevin Gallagher, 2012. "The Myth of Financial Protectionism: The New (and old) Economics of Capital Controls," Working Papers wp278, Political Economy Research Institute, University of Massachusetts at Amherst.
  • Handle: RePEc:uma:periwp:wp278
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    File URL: https://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_251-300/WP278.pdf
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    References listed on IDEAS

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    7. Nicolas Magud & Carmen M. Reinhart, 2007. "Capital Controls: An Evaluation," NBER Chapters,in: Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, pages 645-674 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Kristina Spantig, 2012. "International monetary policy spillovers in an asymmetric world monetary system - The United States and China," Global Financial Markets Working Paper Series 2012-33, Friedrich-Schiller-University Jena.
    2. Young Kevin, 2014. "The complex and covert web of financial protectionism," Business and Politics, De Gruyter, vol. 16(4), pages 1-35, December.
    3. Raouf Boucekkine & Aude Pommeret & Fabien Prieur, 2013. "On the timing and optimality of capital controls: Public expenditures, debt dynamics and welfare," International Journal of Economic Theory, The International Society for Economic Theory, vol. 9(1), pages 101-112, March.
    4. Kristina Spantig, 2015. "International monetary policy spillovers—can the RMB and the euro challenge the hegemony of the US dollar?," Asia Europe Journal, Springer, vol. 13(4), pages 459-478, December.

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • F30 - International Economics - - International Finance - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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