Capital Controls and Financial Crises

Abstract

Capital controls were central to the Bretton Woods era but were sharply stigmatized as self-defeating under the neoliberalism of the 1980s and 1990s. The consensus against capital controls began to crack in the years following the East Asian financial crisis of the late 1990s. Views on capital controls evolved more significantly and consistently during the global financial crisis that began in 2008. Indeed, the normalization and rebranding of capital controls as an instrument of macroprudential management may ultimately be seen as one of the most important legacies of the global crisis. Beginning in 2008 a large number of emerging market and developing economies and several countries on the European periphery implemented far-reaching, heterogeneous controls on capital inflows and outflows in response to diverse economic challenges. Keynesian-inflected ideas about the legitimacy and necessity of managing international capital flows now infuse the work of a broad set of economists in academia and the policy community. The new pragmatic view of the International Monetary Fund recognizes that capital controls are a legitimate part of the policy toolkit. Greater tolerance is also reflected in statements of officials associated with other multilateral institutions, central banks, and credit rating agencies. The complex processes of change around capital controls during and since the global crisis can most accurately be understood as experimental, messy, uneven, contested, and evolving.