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Policy Space to Prevent and Mitigate Financial Crises in Trade and Investment Agreements

  • Kevin P. Gallagher
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    Do nations have the policy space to deploy capital controls in order to prevent and mitigate financial crises? This paper examines the extent to which measures to mitigate this crisis and prevent future crises are permissible under a variety of bilateral, regional and multilateral trade and investment agreements. It is found that the United States trade and investment agreements, and to a lesser extent the WTO, leave little room to manoeuvre when it comes to capital controls. This is the case despite the increasing economic evidence showing that certain capital controls can be useful in preventing or mitigating financial crises. It also stands in contrast with investment rules under the IMF, OECD and the treaties of most capital exporting nations which allow for at least the temporary use of capital controls as a safeguard measure. Drawing on the comparative analysis conducted in the paper, the author offers a range of policies that could be deployed to make the United States investment rules more consistent with the rules of its peers and the economic realities of the 21st century.

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    File URL: http://www.unctad.org/en/Docs/gdsmdpg2420101_en.pdf
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    Paper provided by United Nations Conference on Trade and Development in its series G-24 Discussion Papers with number 58.

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    Date of creation: 2010
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    Handle: RePEc:unc:g24pap:58
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    1. Jörg Mayer, 2009. "Policy Space: What, for What, and Where?," Development Policy Review, Overseas Development Institute, vol. 27(4), pages 373-395, 07.
    2. Dani Rodrik & Arvind Subramanian, 2009. "Why Did Financial Globalization Disappoint?," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 112-138, April.
    3. Nicolas Magud & Carmen M. Reinhart, 2005. "Capital Controls: An Evaluation," University of Oregon Economics Department Working Papers 2005-19, University of Oregon Economics Department.
      • 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.
    4. Kose, M. Ayhan & Prasad, Eswar & Taylor, Ashley D., 2009. "Thresholds in the Process of International Financial Integration," IZA Discussion Papers 4133, Institute for the Study of Labor (IZA).
    5. Laura Alfaro, 2004. "Capital Controls: a Political Economy Approach," Review of International Economics, Wiley Blackwell, vol. 12(4), pages 571-590, 09.
    6. Nico Valckx, 2002. "WTO Financial Services Commitments; Determinants and Impacton Financial Stability," IMF Working Papers 02/214, International Monetary Fund.
    7. Salacuse, Jeswald W., 2010. "The Law of Investment Treaties," OUP Catalogue, Oxford University Press, number 9780199206056, March.
    8. Anne van Aaken & Jürgen Kurtz, 2009. "Prudence or Discrimination? Emergency Measures, the Global Financial Crisis and International Economic Law," Journal of International Economic Law, Oxford University Press, vol. 12(4), pages 859-894, December.
    9. Alexei Kireyev, 2002. "Liberalization of Trade in Financial Services and Financial Sector Stability (Analytical Approach)," IMF Working Papers 02/138, International Monetary Fund.
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