At the recent conference related to G20 issues (discussed in this post), capital controls as a means of managing capital inflows was high on the agenda. The World Economic Forum’s Financial Development Report has a nice schematic outlining some key types of controls:
Table 5 from
World Economic Forum, Financial Development Report, 2010.
The WEF incorporates the Chinn-Ito financial openness index. A recent IMF staff position note, by Jonathan Ostry, Atish R. Ghosh, Karl Habermeier, Marcos Chamon, Mahvash Qureshi, and Dennis Reinhardt, discusses the efficacy of capital controls in some detail.
Update: See also Chapter 3 from October 2007 WEO as well for a discussion of the management of capital inflows.
If a government decides that foreign speculators are not doing the their country any good but only harm, I favor the time limits and the tax model. It should be noted that from time to time switzerland put negative interest rates on some foreign deposits, which is another way to slow flows. Other than for the house of the Casino, one must ask what good for society does all this hot money sloshing around do?
A very tricky matter. Not easy to get this policy right.
When I was consulting with Erste Bank in Hungary back in 2005, many of the loans–particularly mortgages–were Swiss Franc denominated. This in an economy running a budget deficit of 6% of GDP year after year.
Currency risk was a frequent topic of conversation with senior management, and all of us (including me) were of the opinion, “Well, let’s hope nothing goes wrong.” If Hungary converged with the Euro, borrowing in SFr made sense. If there were a crisis, well, we hoped that the Euro-denominated rents would hold up.
But there was little the bank could do about it unilaterally. The customers wanted to borrow in SFr, and either the bank–one of Hungary’s largest–was issuing loans, or it wasn’t. It was.
Could the government of Hungary have intervened? Did the government of Hungary have the sophistication to institute capital controls without causing even greater harm? I have my doubts.
The best the government could have done was to bring the national deficit under control in timely fashion. The socialist government instead spent eight years laying the foundations of a fascist reaction.
The new Media Law was just passed this week. One paper greeted the news with the following loosely-translated headline today: “What Progress! From Today, Only Good News”. Hungarians know censorship when they see it.
All of which has really nothing to do with capital controls.
The fixed capital formation is by definition less volatile and in substance of more added value than the hot capital.It is worth spending sometimes on the following data and charts as provided by the ECB (Statistical data wharehouse, a wealth of data and charts that can be combined).
Go to statistical data wharehouse, http://www.ecb.europa.eu/stats/keyind/html/sdds.en.html
Please go to Euro area economic and financial data,then go to :
Financial account, Direct investment abroad – Euro area 16 (fixed composition) vis-a-vis World (all entities) – Outstanding amounts at the end of the period (stocks) – Neither seasonally nor working day adjusted
4.5 trillion euros in 2010 against 1 trillion euros in 2000
Go to European Central Bank – Statistical Data Warehouse – Quick View
http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=116.BOP.Q.I5.N.8.505.N.A1.E
and
European Central Bank – Statistical Data Warehouse – Quick View
Financial account, Portfolio investment, Assets, Equities securities – Euro area 16 (fixed composition) vis-a-vis World (all entities) –
An interesting chart homotetic of degree 1 with…………..Econbroser .A Post-Mortem on the Fall and Rise in World Trade (see charts)
In 2000 less than 750 billion euros for less than 1.75 trillion euros in 2010 ( a sharp down move in 2009 when the global trade broke down)
http://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=116.BOP.Q.I5.N.8.610.N.A1.E
The risk of capital outflows from abroad, may be material as soon as a Prima Dona of the equities sector, will share his worries on the state of health of the banking sector.The country could be located in Asia.The uplifting of interest rate could do the same business.
The European stock markets were quiet dormant in 2010,with the same honesty we could see a welcome and well timed uplift of the continental European markets in 2011.
Is it so sure that Capital Controls “only”, should be on the Agenda?
The link with Financial Development Report does not operate.
Sometimes accuracy would go with the event forecast,less often with the cause and much less often with the date of occurrence.
Bloomberg
European Stocks, U.S. Futures Gain on China EU Support
By David Merritt – Dec 21, 2010 1:21 PM GMT+0300
uropean stocks and commodities rose to two-year highs on speculation the economic recovery will continue. The euro pared gains as the threat of a rating downgrade for Portugal offset China’s comments that it has taken “concrete action” to ease the sovereign debt crisis.
Bloomberg
December 21 2010
China backs the European Union’s efforts to ensure financial stability, Vice Premier Wang Qishan said today, spurring a rally in the euro.
China supports the International Monetary Fund’s measures and “has taken concrete action to help some EU members counter the sovereign-debt crisis,” Wang said at the start of the Third EU-China High-Level Economic & Trade Dialogu
One would think the World Economic Forum would know how to write “Colombia” properly.
The genesis for this interest in capital controls is, of course, Ben’s short-sighted, beggar-thy-neighbor QE policy. I wonder, did he really expect to affect domestic investment, as opposed to spurring the dollar carry trade? The other way his policy ‘helps’ the economy – supporting already overvalued assets – isn’t such a good long-term strategy, either.
Capital controls in the US can be a risky proposition considering the Dollar is the reserve currency, but it seems incipient capital controls are being set by the changes to the money markets. And countries like Brazil have no choice but to protect themselves against the more dominate and liquid economies by taxing foreign investment.
I suppose the time has come to watch for a devaluing dollar in the face of rising interest rates. Oh boy, that’ll sure cause a lot of havoc.
The World Central Bank Leaders, and Government Finance Ministers have lost their monetary seigniorage, that is their debt sovereignty to the bond vigilantes as established by the fall lower in US 30 Year Government Bonds, EDV, US 10 Year Notes, TLT, World Government Bonds, BWX, and International Corporate Bonds, PICB.
I believe that there will come a day when, out of soon coming financial chaos, that a World Chancellor, the Sovereign, and a World Banker, the Seignior, will rise to power and provide credit and moneyness, but at a cost, that being the loss of national sovereignty. The word, will, and way of the Sovereign and the Seignior will be sovereign globally. Austerity will be required of all. Eventually, there will be a one world currency, that is a global currency, and unified regulation of banking globally as as referred to in the James Politi and Gillian Tett Financial Times article NY Fed Chief In Push For Global Bank Framework,
Could it be that world central bank leaders are now preparing to go beyond traditional capitol controls and are preparing for a world wide federal reserve system, that is a global banking system? Might it be that Leaders’ Framework Agreements, whether formally announced, or agreed upon in private, will serve as the basis for a unified one world banking system to deal with global instabilities? Perhaps so, as Robert Wenzel of EconomicPolicy relates in article Geithner Jets To Brazil: “On Sunday morning, Treasury Secretary Geithner will depart for Sao Paulo, Brazil where he will meet Monday with senior government officials, local business leaders and economists to consult, according to the Treasury on “shared bilateral and G-20 objections and highlight the importance of economic and financial cooperation with the Government of Brazil.””