Capital Control - Explained
What are Capital Control Measures?
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Table of ContentsWhat is Capital Control?Why is Capital Control Important?The Debate Over Capital ControlsReal World ExampleAcademic Research on Capital Control
What is Capital Control?
Capital control refers to a set of measures and procedures taken by the government, Federal Reserve, Central Bank, or other bodies to control the inflow and outflow of foreign capital in an economy. Any regulatory measure targeted at limiting the amount of foreign capital (money) that can be brought into or taken out of a country is a form of capital control. The most common capital control measures are; transaction taxes and tariffs, volume restriction and prohibition, market forces (which pertain to the trade of securities), among other measures.
Back to: ECONOMIC ANALYSIS & MONETARY POLICY
Why is Capital Control Important?
Capital control measures may be targeted at an entire economy or limited to a particular industry, sector or field. For instance, when market-based forces are used as capital control, they only affect the security market and foreign exchanges. Regulating the flow of money generated from the capital markets into and out of a countrys account is an essential practice every government must embrace. Capital control can be done by the government through its agencies and regulatory bodies or by the Central bank or Federal Reserve. When capital control measures are taken, they limit the acquisition fo foreign assets by citizens and the purchase of domestic assets by aliens or foreigners. The following are some vital points to know about capital control;
- Capital control refers to a set of measures take by a government through its agencies or regulatory bodies to control in inflow and outflow of foreign capital in an economy.
- The Central Bank or Federal Reserve can also take capital control measures in the form of fiscal policies to regulate financial flows from the capital market.
- Through monetary policy, the government of a country enacts capital controls.
- Examples of capital control measures are taxes, tariffs, outright prohibition, restrictions, among others. Capital control measures limit the ability of citizens to buy foreign assets and the ability of foreigners to buy domestic assets.
The Debate Over Capital Controls
There has been a long-standing debate over capital controls between the proponents and critics of capital control maintain that such measures guarantee the safety of an economy, critics of capital control argue that it retards the growth and efficiency if the economy. In many countries, liberal capital control measures are used while some governments embrace strict capital control measures. The capital control approach that countries also take is determined by the current situation of the economy in relation to the inflow and outflow of foreign capital in the economy. For instance, when the government perceives an assault on its currency or the presence of capital crisis, stricter capital control measures might be used.
Real World Example
Government, Central banks, Federal Reserves and other regulatory bodies often utilize capital control measures to prevent the aftermath of economic crisis. Usually, after an economic crisis, there is a high tendency that citizens would be more attracted to foreign assets and foreigners would want to generate funds form a domestic country.