Capital controls or cooperation?

My latest at Pieria considers the use of capital controls to mitigate the damaging effect of sudden large capital flows such as those we are currently seeing out of emerging market countries due to the Fed's QE taper.
"Since the 2007/8 financial crisis, there has been considerable discussion about the role of capital flows in the formation of asset bubbles and their subsequent collapse, and about strategies for managing the movements of "hot money" from country to country in search of yield and/or safety. It is fair to say that there is far from a consensus: government policies around the world currently range from the extremely controlling to the totally laissez-faire.
"The outflows of capital from emerging markets arising from the Fed’s tapering of QE have raised again the question of whether capital controls would be appropriate as a short-term measure to calm markets and prevent currency collapse. So far, no country has adopted outright controls, though several are intervening in markets to support their currencies: as I write, the Turkish finance minister (on Twitter) has just ruled out any use of capital controls or transaction taxes. But it is not beyond the bounds of possibility that, faced with currency collapse and/or unsustainable rises in debt burdens, some countries may resort to direct restrictions on capital movements. Would this be an appropriate course of action?"
Read on here.


  1. In that disruptive flows of hot money are caused by QE, I suggest that demonstrates the absurdities of QE rather than a need for capital controls.

    I mean you’re a government that wants to implement stimulus, so you print money and buy up loads of assets (mainly government debt). That channels money just into the pockets of the asset rich, meanwhile Main Street is left out of the elite’s “let’s print some money and pocket it” festivities.

    Then the asset rich in search of yield scour the world for yield that is better than the near zero yield currently on offer in developed countries.

    In contrast, if the new money boosted public spending or household spending in the countries wanting stimulus, most of that money would stay inside the relevant countries.

    Laurel and Hardy couldn’t have thought up something as daft as QE if they’d tried.

  2. QE is only one of many possible causes of disruptive capital flows. For example, in the case of the Eurozone, they were caused by mispricing of risk in periphery countries. The underlying dynamic is always the same, though: idle capital roaming the world looking for yield and/or safety. Investment, it is not.

    1. Hot money is code for the carry trade - an opportunistic monetary play rather than an investment

    2. I was actually aware that "QE is only one of the many possible causes...." That's why my above comment started with the two words "In that..."

  3. As always, this is a very insightful piece. The main point I totally agree with is that economies should use inward capital flows to make productive investment.

    However, there seems to be an underlying theme that flight of hot money is a bad thing, to be avoided and/or prevented. I disagree with this. The flight of hot money is a bit like short selling. It does not cause malinvestment, but recognizes that it has already taken place. The flight of hot money is not so much damaging an economy as recognizing that the damage has been done.

    A few decades ago, British politicians, Wilson for example, were fond of blaming the UK's economic problems on hot money, but in a lot of cases the flight of hot money forced the UK to take actions that could otherwise have been delayed.

    The flight of hot money precipitated devaluation in Wilson's administration, but a devaluation was needed. The exchange rate was too high. Hot money flight was just a trigger, not an underlying cause. The same thing was true when hot money flight helped to force the UK out of the ERM. The UK needed to be out of the ERM. No matter how embarrassing exit was, it was necessary.

    And the price of property in London? Well, hot money is flowing to London property the way it flowed to tech stocks. London property is seen as a store of value and potential appreciation. If it turns out that's wrong, so what? The foreign speculators will lose their shirts, the UK owners who originally sold them the properties have their money in the Bank, and the properties will eventually settle down to their long term appreciation trend. I don't really see the problem.

    If the problem is that domestic buyers can't afford to buy in London, then that's fine. Domestic buyers should not be buying into an over-priced market. When the crash comes, that will be a clear sign that it's safe to buy London property again.

    1. Jon,

      Great comment.

      In arguing against capital controls I am accepting that hot money flows have a role to play. So I don't disagree that hot money movements are important for price discovery. My concern is the welfare effects of sudden disruptive flows. So what I want to see is rather more attention paid to capital flow dynamics by central banks, and if necessary active management of them on a coordinated basis (not unilaterally) to minimise negative welfare effects. I'm certainly not arguing for them to be stopped.

      However, I do think governments need to be much more alert to the causes and effects of hot money flows. The UK government is being exceedingly foolish in hanging its economic strategy on what looks to me like a short-term housing market boost caused by hot money flows. But in my view it was even more foolish to prevent a necessary correction in the housing market. Price corrections may need to be managed, because (again) of their effect on welfare, but they certainly shouldn't be prevented. I reckon London property is at least 30% overvalued and rising, and this is what is attracting the hot money.

  4. Frances,

    This is a strictly off topic question about the blogs you read. I enjoy many, though some are over intellectual grasp, but why the execrable Tim Worstall? He has nothing original to say and on the rare occasion he makes a point he's always wrong. take the pile of piffle he's just spouted about Pinochet. I give up on him and cannot understand why you don't.


    1. He's amusing. And he doesn't censor comments. So I can take him apart on his own blogsite if I choose. Not many people allow that. Admittedly that means I am fair game, but hey-ho.

  5. Capital controls and cooperation differs from country to country and company to company, some needs more control while some don't.


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