Capital Controls and Monetary Policy in Developing Countries

This paper looks at the potential for using capital controls as a means of reducing this volatility, as well as the economic damage that it can cause. It also examines some case studies in which capital controls were implemented in various countries in recent decades.

One of the main problems caused by uncontrolled capital movements is their effect on the real exchange rate. A surge of capital inflows, especially short-term and/or speculative inflows, can cause the domestic currency to appreciate. This can reduce competitiveness in the country’s tradable goods sector, slow economic growth, and harm economic development by increasing the volatility and hence uncertainty of international prices.