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Capital Controls and the Global Financial Crisis
by Kevin P. Gallagher
PERI Working Paper No. 250
The global financial crisis has triggered a transformation in thinking and practice regarding the role of government in managing international capital flows. This paper traces and evaluates the re-emergence of capital controls as legitimate tools to promote financial stability. Whereas capital controls were seen as “orthodox” by the framers of the Bretton Woods system, they were shunned during the neo-liberal era that began in the late 1970s.
There is now an emerging consensus that capital controls can play a legitimate role in promoting financial stability. From 2009 to early 2011 a number of developing nations resorted to capital controls to halt the appreciation of their currencies, and to pursue independent monetary policies to cool asset bubbles and inflation.
GDAE senior research associate Kevin P. Gallagher conducts a preliminary analysis of the effectiveness of capital controls in Brazil, South Korea, and Taiwan. Gallagher finds supporting evidence that Brazil and Taiwan have been relatively successful in deploying controls, though South Korea’s success has been more modest.
The fact that capital controls continue to yield positive results is truly remarkable, given the fact that there has been little (or contrary) support for global coordination, and that many nations lack the necessary institutions for effective policies. The paper concludes by pointing to the need for more concerted global and national efforts to manage global capital flows for stability and growth.
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The Global Development and Environment Institute’s Globalization and Sustainable Development Program examines the economic, social and environmental impacts of economic integration in developing countries, with a particular emphasis on the WTO and NAFTA's lessons for trade and development policy. The goal of the program is to identify policies and international agreements that foster sustainable development.