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Mr. Atish R. Ghosh and Miss Mahvash S Qureshi

suspicion and deep misgivings over their use. An-oft heard argument against capital controls is that they are subject to evasion and circumvention, yet one never hears the same argument applied to other policy instruments—for instance, that taxes should be abolished because they are subject to evasion. Likewise, despite being very much in vogue since the global financial crisis, the evidence on the effectiveness of macroprudential measures is hardly conclusive. 2 It is telling, moreover, that even when capital inflow controls are employed, countries often prefer to use

Mr. Atish R. Ghosh, Mr. Jonathan David Ostry, and Miss Mahvash S Qureshi

, there is a logical reasoning (or “natural mapping”) between instruments and risks ( Blanchard et al., 2014 ). Thus, monetary and fiscal policies can help to address the inflation and economic overheating concerns raised by capital inflows; when the currency is not undervalued, foreign exchange (FX) intervention can be used to limit currency appreciation that threatens competitiveness; and prudential measures can be applied to curb excessive credit growth and related financial-stability risks. Capital inflow controls, if applied sufficiently broadly, can buttress these

Mr. Atish R. Ghosh, Mr. Jonathan David Ostry, and Miss Mahvash S Qureshi
This paper examines whether—and how—emerging market economies (EMEs) respond to capital flows to mitigate their untoward consequences. Based on a sample of about 50 EMEs over 2005Q1–2013Q4, we find that EME policy makers respond proactively to capital inflows by using a combination of policy tools: central banks raise the policy interest rate to address economic overheating concerns; intervene in the foreign exchange market to resist currency appreciation pressures; tighten macroprudential measures to dampen credit growth; and deploy capital inflow controls in the face of competitiveness and financial-stability concerns. Contrary to conventional policy advice to EMEs, we find no evidence of counter-cyclical fiscal policy in the face of capital inflows. Overall, policies are more likely to respond, and used in combination, during inflow surges than in more normal times.
Mr. Atish R. Ghosh and Miss Mahvash S Qureshi
This paper investigates why controls on capital inflows have a bad name, and evoke such visceral opposition, by tracing how capital controls have been used and perceived, since the late nineteenth century. While advanced countries often employed capital controls to tame speculative inflows during the last century, we conjecture that several factors undermined their subsequent use as prudential tools. First, it appears that inflow controls became inextricably linked with outflow controls. The latter have typically been more pervasive, more stringent, and more linked to autocratic regimes, failed macroeconomic policies, and financial crisis—inflow controls are thus damned by this “guilt by association.” Second, capital account restrictions often tend to be associated with current account restrictions. As countries aspired to achieve greater trade integration, capital controls came to be viewed as incompatible with free trade. Third, as policy activism of the 1970s gave way to the free market ideology of the 1980s and 1990s, the use of capital controls, even on inflows and for prudential purposes, fell into disrepute.