## _wp1625 - References

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### I. INTRODUCTION — key propositions and framing
- Capital controls, particularly on inflows, carry strong stigma despite recent evidence of potential usefulness (cited: Ostry et al., 2010, 2011; IMF, 2012a).
- Common criticisms of inflow controls (evasion/circumvention, persistence, encouraging poor macro policies, ineffectiveness) are often conflated with problems associated with outflow controls.
- Historical practice shows advanced economies used inflow controls during financial development; opposition reflects “guilt by association” with outflow controls and with exchange restrictions that historically impeded both goods and capital movements.
- Modern assessment recommendation: weigh pros and cons of inflow controls in light of specific country circumstances and against other available policy tools.

### II. A SNAPSHOT OF HISTORY — major phases and stylized facts
- Five key historical phases: gold-standard era (pre-World War I), interwar years, Bretton Woods era, adoption of generalized floating, aftermath of the global financial crisis.
- Long-run stylized fact: capital controls have a very long history; modern flows and controls evolved with monetary regimes and political objectives.

### A. The Golden Era of Financial Globalization (late 19th–early 20th century)
- Major capital exporters: Great Britain, France, Germany; exporters sometimes sent as much as "five to ten percent of GDP per year" of mainly long-term capital.
- By eve of World War I (1914):
  - Britain national saving reached "16 percent of GDP."
  - Stock of British foreign assets equal to "US$18.5 billion" (more than one and one-half times national income; one-quarter of national wealth).
- Long-term lending cycles (British examples):
  - rose from "less than 2 percent of GDP in 1860 to 8 percent of GDP in 1872";
  - fell to "about 1 percent of GDP" after Panic of 1873;
  - rose to "more than 7 percent of GDP" in 1880s;
  - collapsed to "less than 2 percent of GDP" after Panic of 1893.
- Inflow restrictions focused on limiting foreign control of “strategic” industries (examples: Russian decree of 1887; Prussian law of 1909; Sweden 1910; Czechoslovakia restrictions).

### B. The Interwar Period — collapse of liberal order and expansion of outflow controls
- World War I interrupted private international capital flows; postwar attempts to restore gold standard culminated in 1920s lending booms (Dawes Plan).
- Crash and sudden stops:
  - New York stock market crash October 1929 led to capital reversal; by September 1930 Reichsbank lost "RM1 billion (US$250 million) in the last quarter of the year."
  - Creditanstalt losses in May 1931 precipitated payments standstills and exchange restrictions (July 1931 Germany); Pound forced off gold in September 1931.
- Resulting decade: "capital flight, hot money flows, competitive devaluations, exchange restrictions and capital controls (nearly all on outflows), protectionism, and imploding global trade."
- U.S. experience in 1935–39:
  - US capital inflows reached "US$1.5 billion" in 1935 and "more than US$2 billion" in 1939.
  - Policy reluctance to impose inflow controls; limited precedent: Switzerland 1937 measures on nonresident deposits.

### C. The Bretton Woods Era — formal acceptance of capital controls' legitimacy
- Bretton Woods (July 1944) designers saw free capital mobility as incompatible with macroeconomic management and free trade; capital controls were envisaged as structural.
- IMF Articles (22 July 1944) allowed members to exercise controls "as are necessary to regulate international capital movements."
- 1950s–1960s: widespread use of capital controls, mainly on outflows; advanced economies often maintained controls longer than many emerging markets.
- Selected advanced-economy inflow control measures and tightening (as presented):
  - Germany:
    - higher reserve requirements on nonresident deposits;
    - prohibitions on sale of domestic money-market paper to nonresidents;
    - cash deposit requirement "Bardepot" of "40 percent" on foreign loans;
    - suspension of interest payments on nonresident deposits; authorization requirements on purchases by nonresidents.
  - Switzerland:
    - charges on nonresident short-term balances (negative interest equivalent);
    - limits on nonresident sight deposits; nonremuneration of foreign credits.
  - United States:
    - Interest Equalization Tax (early 1960s; broadened by 1970);
    - U.S. policy shifted to active opposition to coordinated controls by 1971–73.
- Note: measures often targeted short-term speculative inflows to curb appreciation pressure, inflationary/credit booms, or destabilizing stock market bubbles.

### D. Advent of Floating and the Washington Consensus (late 1960s–1970s)
- Floating exchange rates in early 1970s resolved the "impossible trinity" by dropping fixed exchange rates, favoring monetary autonomy with capital mobility.
- By 1974 U.S. abandoned outflow capital controls and embraced liberal private capital flows; the 1973 Economic Report of the President cautioned against controls for balance-of-payments purposes.
- Divergent paths: advanced economies moved toward liberalization, while many developing/emerging markets increased restrictiveness in late 1960s–1970s (examples: Latin America after Brazil 1965 coup; South Asia; some East Asian countries).

### Historical episodes and numeric facts (selected country cases)
- France:
  - Outflow controls re-imposed after Paris riots in May 1968 invoking the EC safeguards clause.
  - 1971: 100 percent marginal reserve requirement on incremental nonresident franc deposits applied.
  - Onshore–offshore franc interest rate differential reached 5 percent per year during the 1973–1970s episode.
  - Franc devalued twice: January 1974 and March 1976.
  - Between 1976 and establishment of the EMS in 1979, franc depreciated by a further 30 percent against the Deutschemark.
  - Most French outflow controls lifted during 1984–86; full capital account liberalization achieved by 1990.
- Japan and Switzerland:
  - Japan: eased nonresident portfolio purchases after October 1973 oil shock; tightened in 1977.
  - Switzerland: 1978 prohibition on purchase of domestic stocks and bonds by foreigners, terminated in early 1979.
  - Bundesbank: January 1978 reserve requirement of 100 percent on growth of external liabilities to nonresidents, terminated five months later.
- Chile:
  - Pre-1981: foreign borrowing by commercial banks required central bank approval; foreign borrowing with <5½ year maturity subject to reserve requirements of 10 percent to 25 percent.
  - Early 1980s liberalization removed/reduced restrictions; surge in inflows produced current account deficit of 14 percent of GDP; banking system credit to the private sector expanded 40 percent between end-December 1981 and June 1982.
  - Mid-1983: non-performing loans reached 113 percent of bank capital; much of the banking system nationalized; GDP contracted 15 percent relative to 1981.
  - June 1991: central bank introduced a 20 percent unremunerated reserve requirement (URR) on foreign borrowing; URR later extended and raised to 30 percent until capital inflows abated during the 1997/98 Asian crisis, at which point the URR was eliminated.

### Surges, reversals, and measured impacts (Global Financial Crisis examples)
- Lehman (September 2008) triggered abrupt reversal: capital flows to emerging markets dropped by US$ 240 billion in net terms in one quarter.
- Emerging Europe: net flows fell by about US$ 150 billion between the last two quarters of 2008.
- By mid-2009 flows to emerging markets rebounded sharply.
- Country-level post-crisis measures and exact instruments:
  - Brazil (2009–12): tax on foreign portfolio equity and fixed income inflows introduced at 2 percent in October 2009, gradually raised to 6 percent; extended to other foreign flows including depository receipts and short-maturity foreign borrowing; URR of 60 percent on banks' gross FX positions beyond USD 3 bln (later tightened to USD 1 bln).
  - Colombia (2007): URR on foreign borrowing and portfolio inflows; limits on banks’ currency derivative positions (500 percent of capital).
  - Thailand (December 2006): URR of 30 percent on all foreign inflows with 10 percent penalty if withdrawn in less than one year; immediate market reaction: Thai stock market plunged 15 percent in less than one day.
  - Korea: restored a 14 percent withholding tax on interest income on nonresident purchases of treasury/monetary stabilization bonds.
  - Peru: extended a 60 percent reserve requirement for new foreign holders of debt with maturity up to three years.
  - Uruguay: introduced a 40 percent reserve requirement later raised to 50 percent on new foreign purchases of central bank notes and central government securities.

### Evolution of IMF thinking, policy guidance, and operational vocabulary
- IMF research culminated in the Institutional View on the Liberalization and Management of Capital Flows (IMF, 2012a).
- Institutional View established that currency-based prudential measures are often economically indistinguishable from capital controls.
- Institutional View: “there is no presumption that full liberalization is an appropriate goal for all countries at all times.”
- Introduced nomenclature “capital flow management (CFM)” measures to encompass capital controls and certain macroprudential measures; capital controls are always CFMs, but whether a prudential measure is a CFM depends on intent to influence cross-border flows.
- Institutional View stresses CFMs “should not however substitute for warranted macroeconomic adjustment,” and that, for financial-stability purposes, capital controls could be maintained longer term if no effective nonresidency-based measure is available.
- Attempts to amend IMF Articles (1995–97) led by Managing Director Michel Camdessus did not pass; opposition included the US financial community (IIF) and concerns from emerging market/developing countries.
- IMF staff advice in 1990s episodes (Independent Evaluation Office review) across 19 episodes with large inflows out of 27 emerging market economies:
  - Tighten fiscal policy in 12 cases;
  - Allow greater exchange rate flexibility in 14 cases;
  - Tighten monetary policy and/or sterilize intervention in 17 cases;
  - Liberalize outflows in 6 cases;
  - Tighten prudential measures in 4 cases;
  - Impose or tighten inflow controls in just 2 cases.

### Effectiveness, criticisms, and rebuttals regarding inflow controls
- Common criticisms and counterpoints:
  - Guilt by association: inflow controls often criticized because conflated with outflow controls which were historically more stringent and associated with autocratic regimes.
  - Persistence and reversibility: persistence argument more applicable to outflow controls; inflow measures are typically reversible taxes, withholding taxes, or higher reserve requirements and often removed when inflows abate (examples: Brazil, Chile, Colombia, Indonesia, Peru).
  - Signaling and effectiveness: no conclusive evidence inflow measures permanently deter future reinvestment; evidence suggests inflow measures can tilt composition toward less risky and longer-maturity flows (evidence on exchange rate appreciation effects is mixed).
  - Administrative burden and distortions: inflow controls can be administratively burdensome, encourage arbitrage, hurt small firms, damage liquidity, and cause rent-seeking—but such drawbacks also apply to alternative tools.
  - Spillovers and multilateral concerns: spillovers from short-term inflow controls documented by some studies; not unique to inflow controls.
- Theoretical advances:
  - Models show externalities can produce excessively risky foreign borrowing; targeted capital controls calibrated to liability risk can be welfare-improving (Jeanne and Korinek, 2010; Korinek, 2011; Bianchi, 2011).

### Practical policy implications and recommendations
- No presumption of universal full liberalization:
  - Assess capital account openness against domestic financial and macroeconomic conditions; “no presumption that full liberalization is an appropriate goal for all countries at all times.”
- Integrated approach to liberalization and management:
  - Proceed through successive and overlapping phases of lifting controls on inflows and outflows, taking into account domestic conditions and policies.
- Toolkit calibration and sequencing:
  - Combine macroeconomic adjustment (fiscal, monetary, exchange rate flexibility) with prudential measures; consider CFMs (including targeted inflow measures) when warranted to manage surges.
- Time consistency and reversibility:
  - Favor measures that are targeted, time-bound, and reversible where possible (evidence shows many inflow measures have been temporary and removed when conditions changed).
- Recognize equivalence of tools:
  - Currency-based prudential measures may be economically indistinguishable from capital controls—policy choice should weigh costs, benefits, administrative feasibility, and spillover risks.

### Key analytical conclusions
- Historical evidence: advanced and emerging economies have intermittently used capital controls (inflows and outflows) as crisis-prevention and macroprudential tools across several decades.
- Misplaced stigma: inflow controls have an undeservedly bad name largely due to conflation with outflow controls and historical association with current account/exchange restrictions.
- Policy neutrality: inflow controls are neither inherently worse nor costlier than alternative measures; suitability depends on country-specific circumstances and availability/costs of other instruments.
- Decision framework: use a balanced assessment of country conditions, calibrate measures to the specific risks (composition, maturity, currency of flows), and avoid all-or-nothing stances on capital account openness.

### Key statistics and exact numeric facts (preserved)
- Britain’s end-1913 stock of foreign assets: "US$18.5 billion."
- Britain national saving: "16 percent of GDP" (on eve of WWI).
- British long-term lending cycles: "less than 2 percent of GDP in 1860", "8 percent of GDP in 1872", "about 1 percent of GDP" after Panic of 1873, "more than 7 percent of GDP" in 1880s, "less than 2 percent of GDP" after Panic of 1893.
- Interwar Reichsbank loss: "RM1 billion (US$250 million)" in last quarter of 1930.
- US capital inflows: "US$1.5 billion" in 1935; "more than US$2 billion" in 1939.
- Table 1 totals (end-1913): Britain "18,552"; France "8,854"; Germany "5,555"; Total (percent of GDP) for Britain "160", France "90.8", Germany "44.8".
- Germany cash deposit requirement ("Bardepot") of "40 percent" on foreign loans (1968–73 measures).
- Coding of capital controls indices: restrictions coded as "0: none, 0.25: mild, 0.75: significant, 1: extreme".
- France 1971: 100 percent marginal reserve requirement on incremental nonresident franc deposits.
- Onshore–offshore franc interest rate differential reached 5 percent per year during 1973–1970s episode.
- Between 1976 and 1979 franc depreciated by 30 percent against the Deutschemark.
- Chile current account deficit reached 14 percent of GDP in early 1980s; banking system credit expanded 40 percent between end-December 1981 and June 1982.
- Mid-1983 Chile non-performing loans: 113 percent of bank capital; GDP contracted 15 percent relative to 1981.
- Chile June 1991 URR: 20 percent; later raised to 30 percent during 1997/98 Asian crisis period.
- Global financial crisis: capital flows to emerging markets dropped by US$ 240 billion in net terms in one quarter (post-Lehman).
- Emerging Europe net flows fell by about US$ 150 billion between the last two quarters of 2008.
- Brazil (2009–12): tax on foreign portfolio inflows introduced at 2 percent in October 2009, gradually raised to 6 percent; URR of 60 percent on banks' gross FX positions beyond USD 3 bln, later tightened to USD 1 bln.
- Thailand (December 2006): URR of 30 percent on all foreign inflows with 10 percent penalty if withdrawn in less than one year; Thai stock market plunged 15 percent in less than one day.
- Korea: restored a 14 percent withholding tax on interest income on nonresident purchases of certain bonds.
- Peru: extended a 60 percent reserve requirement for new foreign holders of debt with maturity up to three years.
- Uruguay: introduced 40 percent reserve requirement later raised to 50 percent on new foreign purchases of central bank notes and central government securities.

### References and thematic coverage (selected works and institutional papers preserved)
- Abdelal, R., 2006, “Writing the Rules of Global Finance: France, Europe, and Capital Liberalization,” Review of International Political Economy, 13 (1): 1–27.
- Abdelal, R., 2007, Capital Rules (Cambridge, MA: Harvard University Press).
- Ariyoshi, A., K. Habermeier, B. Laurens, I. Ötker-Robe, J. Canales-Kriljenko, and A. Kirilenko, 2000, Capital Controls: Country Experiences with their Use and Liberalization, IMF Occasional Paper 190 (Washington DC: International Monetary Fund).
- Bianchi, J., 2011, “Overborrowing and Systemic Externalities in the Business Cycle,” American Economic Review, 101 (7): 3400–3426.
- Eichengreen, B., 1992, Golden Fetters (New York: Oxford University Press).
- Ghosh, A., J. Ostry, and M. Qureshi, 2016, “Why Do Capital Inflow Surges End in Tears?” American Economic Review Papers and Proceedings, forthcoming.
- Korinek, A., 2011, “The New Economics of Capital Controls,” IMF Economic Review, 59 (3): 523–561.
- Ostry, J., A. Ghosh, K. Habermeier, M. Chamon, M. Qureshi, and D. Reinhardt, 2010, “Capital Inflows: The Role of Controls,” IMF Staff Position Note 10/04 (Washington DC: International Monetary Fund).
- Ostry, J., A. Ghosh, M. Chamon, and M. Qureshi, 2012a, “Tools for Managing Financial-Stability Risks from Capital Inflows,” Journal of International Economics, 88 (2): 407–421.
- Stiglitz, J., 2002, “Capital Market Liberalization, Economic Growth, and Instability,” World Development, 28 (6): 1075-1086.
- Summers, L., 1998, “Building an International Financial Architecture for the 21st Century,” Remarks to the Cato Institute, 16th Annual Monetary Conference, Washington, DC, October 22, 1998.
- Institutional and working papers cited: IMF Working Paper WP/02/52; IMF Occasional Paper 190; IMF Occasional Paper 214; IMF Staff Position Note 10/04; IMF Staff Discussion Note SDN/12/10; IMF Working Paper WP/14/188; NBER Working Paper 20612; NBER Working Paper 18052; Bank of England Working Paper 524; CEPR Discussion Paper No. DP10926; DNB Working Paper No. 440.

*Source: _wp1625 - References (content excerpt).*

### References .............................................................................................................

### _wp1625 - References

### I. INTRODUCTION — key propositions and framing
- Capital controls, particularly on inflows, carry strong stigma despite recent evidence of potential usefulness (cited: Ostry et al., 2010, 2011; IMF, 2012a).
- Common criticisms of inflow controls (evasion/circumvention, persistence, encouraging poor macro policies, ineffectiveness) are often conflated with problems associated with outflow controls.
- Historical practice shows advanced economies used inflow controls during financial development; opposition reflects “guilt by association” with outflow controls and with exchange restrictions that historically impeded both goods and capital movements.
- Modern assessment recommendation: weigh pros and cons of inflow controls in light of specific country circumstances and against other available policy tools.

### II. A SNAPSHOT OF HISTORY — major phases and stylized facts
- Five key historical phases traced: gold-standard era (pre-World War I), interwar years, Bretton Woods era, adoption of generalized floating, and aftermath of the global financial crisis.
- Long-run stylized fact: capital controls have a very long history, including exchange controls in ancient times; modern flows and controls evolved with monetary regimes and political objectives.

### A. The Golden Era of Financial Globalization (late 19th–early 20th century)
- Major capital exporters: Great Britain, France, Germany; exporters sometimes sent as much as "five to ten percent of GDP per year" of mainly long-term capital (Figure 1).
- By eve of World War I (1914):
  - Britain national saving reached "16 percent of GDP," with stock of British foreign assets equal to "US$18.5 billion" (more than one and one-half times national income; one-quarter of national wealth).
- Capital flows were largely long-term; few formal capital controls existed, though political influence was exerted via listing restrictions and eligibility for central bank discounting.
- Inflow restrictions that did exist focused on limiting foreign control of “strategic” industries (examples: Russian decree of 1887; Prussian law of 1909; Sweden 1910; Czechoslovakia restrictions).

### B. The Interwar Period — collapse of liberal order and expansion of outflow controls
- World War I interrupted private international capital flows; postwar attempts to restore gold standard culminated in 1920s lending booms (Dawes Plan).
- Crash and sudden stops:
  - New York stock market crash October 1929 led to capital reversal; by September 1930 Reichsbank lost "RM1 billion (US$250 million) in the last quarter of the year."
  - Creditanstalt losses in May 1931 precipitated payments standstills and exchange restrictions (July 1931 Germany), and the Pound forced off gold in September 1931.
- Resulting decade: "capital flight, hot money flows, competitive devaluations, exchange restrictions and capital controls (nearly all on outflows), protectionism, and imploding global trade."
- U.S. experience in 1935–39:
  - US capital inflows reached "US$1.5 billion" in 1935 and "more than US$2 billion" in 1939.
  - Policy reluctance to impose inflow controls; examples of limited precedent: Switzerland 1937 measures on nonresident deposits.

### C. The Bretton Woods Era — formal acceptance of capital controls' legitimacy
- Bretton Woods (July 1944) designers (Keynes, White) saw free capital mobility as incompatible with macroeconomic management and free trade; they envisaged capital controls as structural.
- Final IMF Articles (22 July 1944) diluted original cooperative enforcement proposals; Article VI.3 states members may exercise controls "as are necessary to regulate international capital movements."
- 1950s–1960s: widespread use of capital controls, mainly on outflows; advanced economies often maintained controls longer than many emerging markets (Figure 6).
- Examples of advanced-economy inflow control measures and tightening (selected cases summarized in Table 2) include:
  - Germany (1957, 1960–61, 1965, 1968–73, 1977–78): higher reserve requirements on nonresident deposits; prohibitions on sale of domestic money-market paper to nonresidents; cash deposit requirement "Bardepot" of "40 percent" on foreign loans; suspension of interest payments on nonresident deposits; authorization requirements on purchases by nonresidents.
  - Switzerland (1937–39, 1950–51, 1955–58, 1960, 1971–79): charges on nonresident short-term balances (negative interest equivalent); limits on nonresident sight deposits; nonremuneration of foreign credits (Spain 1989).
  - United States: Interest Equalization Tax (early 1960s; broadened by 1970); U.S. policy shifted to active opposition to coordinated controls by 1971–73.
- Note: specific country measures often targeted short-term speculative inflows to curb appreciation pressure, inflationary/credit booms, or prevent destabilizing stock market bubbles.

### D. Advent of Floating and the Washington Consensus (late 1960s–1970s; partial discussion)
- Floating exchange rates in early 1970s resolved the "impossible trinity" by dropping fixed exchange rates, favoring monetary autonomy with capital mobility.
- By 1974 U.S. abandoned outflow capital controls and embraced liberal private capital flows; the 1973 Economic Report of the President cautioned against controls for balance-of-payments purposes.
- Parallel policy divergence: advanced economies moved toward liberalization, while many developing/emerging markets increased restrictiveness in late 1960s–1970s (e.g., Latin America after Brazil 1965 coup; South Asia after independence experiments; some East Asian countries tightened controls for development/adjustment concerns).

### Key statistics and exact numeric facts (preserved from source)
- Britain’s end-1913 stock of foreign assets: "US$18.5 billion."
- Britain national saving: "16 percent of GDP" (on eve of WWI).
- British long-term lending cycles: rose from "less than 2 percent of GDP in 1860 to 8 percent of GDP in 1872", fell to "about 1 percent of GDP" after Panic of 1873; rose to "more than 7 percent of GDP" in 1880s; collapsed to "less than 2 percent of GDP" after Panic of 1893.
- Interwar Reichsbank loss: "RM1 billion (US$250 million)" in last quarter of 1930.
- US capital inflows: "US$1.5 billion" in 1935; "more than US$2 billion" in 1939.
- Table 1 totals (end-1913, as presented): Britain total "18,552" (US dollars, presumably mln.), France "8,854", Germany "5,555"; Total (percent of GDP) for Britain "160", France "90.8", Germany "44.8" (as presented in table layout).
- Germany cash deposit requirement ("Bardepot") of "40 percent" on foreign loans (1968–73 measures).
- Coding of capital controls indices: restrictions coded as "0: none, 0.25: mild, 0.75: significant, 1: extreme" (Figure 6 note).

### Historical interpretation and policy implications distilled
- Historical record suggests:
  - Inflow and outflow controls have distinct historical roles and effects; conflation has biased policy perceptions.
  - Outflow controls historically associated with authoritarianism, crisis response, and preservation of failed macro policies—this association taints views of inflow controls.
  - Inflow controls have been used in advanced economies (notably during financial development and in response to speculative short-term flows); their abandonment often reflected other motives (regional integration, desire to be global financial centers) rather than inherent inferiority.
- Contemporary policy recommendation (qualitative): evaluate inflow controls as one policy instrument among others, considering:
  - the specific macroeconomic and financial-stability risks (e.g., short-term speculative inflows, appreciation pressure, credit expansion),
  - complementarities with prudential measures,
  - whether measures are targeted at both "ends" of transactions for effectiveness,
  - tradeoffs with openness objectives (trade, financial integration, role as financial center).

*Source: _wp1625 - References (content excerpt).*

### 1966. But the Paris riots in May 1968 forced the authorities to re-impose outflow controls,

### _wp1625 - 1966. But the Paris riots in May 1968 forced the authorities to re-impose outflow controls,

### Historical episodes of capital controls and key numeric facts
- France:
  - Outflow controls re-imposed after the Paris riots in May 1968 invoking the EC safeguards clause.
  - 1971: 100 percent marginal reserve requirement on incremental nonresident franc deposits applied.
  - Onshore–offshore franc interest rate differential reached 5 percent per year during the 1973–1970s episode.
  - Franc devalued twice: January 1974 and March 1976.
  - Between 1976 and the establishment of the EMS in 1979, the franc depreciated by a further 30 percent against the Deutschemark.
  - Most French outflow controls lifted during 1984–86; full capital account liberalization achieved by 1990.
- Japan and Switzerland:
  - Japan: shifting use of inflow and outflow restrictions through the 1970s (e.g., easing nonresident portfolio purchases after October 1973 oil shock; tightening in 1977).
  - Switzerland: 1978 prohibition on purchase of domestic stocks and bonds by foreigners, terminated in early 1979.
  - Bundesbank: January 1978 reserve requirement of 100 percent on growth of external liabilities to nonresidents, terminated five months later.
- Chile (liberalization, crisis, and response):
  - Pre-1981: foreign borrowing by commercial banks required central bank approval; foreign borrowing with <5½ year maturity subject to reserve requirements of 10 percent to 25 percent.
  - Early 1980s financial liberalization removed/reduced restrictions; subsequent surge in inflows produced: current account deficit reached 14 percent of GDP; banking system credit to the private sector expanded 40 percent between end-December 1981 and June 1982.
  - Mid-1983: non-performing loans reached 113 percent of bank capital; much of the banking system nationalized; GDP contracted 15 percent relative to 1981.
  - June 1991: central bank introduced a 20 percent unremunerated reserve requirement (URR) on foreign borrowing; URR later extended and raised to 30 percent until capital inflows abated during the 1997/98 Asian crisis, at which point the URR was eliminated.

### Surges, reversals, and measured impacts (Global Financial Crisis examples)
- Global financial crisis:
  - With Lehman (September 2008) capital flows reversed abruptly: capital flows to emerging markets dropped by US$ 240 billion in net terms in one quarter.
  - Emerging Europe: net flows fell by about US$ 150 billion between the last two quarters of 2008.
  - By mid-2009 flows to emerging markets rebounded sharply.
- Country-level post-crisis measures and exact numeric instruments:
  - Brazil (2009–12): tax on foreign portfolio equity and fixed income inflows introduced at 2 percent in October 2009, gradually raised to 6 percent; extended to other foreign flows including depository receipts and short-maturity foreign borrowing; URR of 60 percent on banks' gross FX positions beyond USD 3 bln (later tightened to USD 1 bln).
  - Colombia (2007): URR on foreign borrowing and portfolio inflows; limits on banks’ currency derivative positions (500 percent of capital).
  - Thailand (December 2006): URR of 30 percent on all foreign inflows with 10 percent penalty if withdrawn in less than one year; immediate market reaction: Thai stock market plunged 15 percent in less than one day.
  - Other post-crisis measures (selected): Korea restored a 14 percent withholding tax on interest income on nonresident purchases of treasury/monetary stabilization bonds; Peru extended a 60 percent reserve requirement for new foreign holders of debt with maturity up to three years; Uruguay introduced a 40 percent reserve requirement later raised to 50 percent on new foreign purchases of central bank notes and central government securities.

### Evolution of IMF thinking, policy guidance, and operational vocabulary
- IMF research and Institutional View:
  - IMF produced a series of research and policy papers culminating in the IMF’s Institutional View on the Liberalization and Management of Capital Flows (IMF, 2012a).
  - Institutional View established that currency-based prudential measures are often economically indistinguishable from capital controls.
  - Institutional View: “there is no presumption that full liberalization is an appropriate goal for all countries at all times.”
  - Introduced the nomenclature “capital flow management (CFM)” measures to encompass capital controls and certain macroprudential measures; capital controls are always CFMs, but whether a prudential measure is a CFM depends on intent to influence cross-border flows.
  - Institutional View stresses that CFMs “should not however substitute for warranted macroeconomic adjustment,” and that, for financial-stability purposes, capital controls could be maintained longer term if no effective nonresidency-based measure is available.
- Attempts to amend IMF Articles (mid-1990s):
  - 1995–97 initiative led by IMF Managing Director Michel Camdessus to amend IMF Articles to cover capital movements and promote capital account liberalization did not pass.
  - Opposition: US financial community (IIF) and emerging market/developing countries fearful of premature liberalization; US Congressional actions blocked the initiative.
- IMF staff advice in 1990s episodes (Independent Evaluation Office review):
  - In 19 episodes (covering 16 countries) with large inflows out of 27 emerging market economies, staff counseled:
    - Tighten fiscal policy in 12 cases;
    - Allow greater exchange rate flexibility in 14 cases;
    - Tighten monetary policy and/or sterilize intervention in 17 cases;
    - Liberalize outflows in 6 cases;
    - Tighten prudential measures in 4 cases;
    - Impose or tighten inflow controls in just 2 cases.

### Effectiveness, criticisms, and rebuttals regarding inflow controls
- Common criticisms and counterpoints:
  - Guilt by association:
    - Inflow controls often criticized because they are conflated with outflow controls; outflow controls were historically more prevalent, stringent, and associated with autocratic regimes and financial repression.
  - Persistence and reversibility:
    - Argument that inflow controls are persistent is more applicable to outflow controls; inflow measures are typically reversible taxes, withholding taxes, or higher reserve requirements and often removed when inflows abate (e.g., Brazil, Chile, Colombia, Indonesia, Peru).
  - Signaling and effectiveness:
    - No conclusive evidence inflow measures permanently deter future reinvestment; anecdotal and empirical evidence suggests inflow measures can tilt composition toward less risky and longer-maturity flows (evidence on exchange rate appreciation effects is mixed).
  - Administrative burden and distortions:
    - Inflow controls can be administratively burdensome, encourage arbitrage, hurt small firms, damage liquidity, and cause rent-seeking—but such drawbacks also apply to alternative tools (prudential measures, fiscal instruments).
  - Spillovers and multilateral concerns:
    - Spillovers from short-term inflow controls documented by some studies; however, spillovers are not unique to inflow controls and apply to other policy instruments as well.
- Theoretical advances:
  - Models show externalities can produce excessively risky foreign borrowing; targeted capital controls calibrated to liability risk can be welfare-improving (Jeanne and Korinek, 2010; Korinek, 2011; Bianchi, 2011).

### Practical policy implications and recommendations
- No presumption of universal full liberalization:
  - Assess capital account openness against domestic financial and macroeconomic conditions; “no presumption that full liberalization is an appropriate goal for all countries at all times.”
- Integrated approach to liberalization and management:
  - Proceed through successive and overlapping phases of lifting controls on inflows and outflows, taking into account domestic conditions and policies.
- Toolkit calibration and sequencing:
  - Combine macroeconomic adjustment (fiscal, monetary, exchange rate flexibility) with prudential measures; consider CFMs (including targeted inflow measures) when warranted to manage surges.
- Time consistency and reversibility:
  - Favor measures that are targeted, time-bound, and reversible where possible (evidence shows many inflow measures have been temporary and removed when conditions changed).
- Recognize equivalence of tools:
  - Currency-based prudential measures may be economically indistinguishable from capital controls—policy choice should weigh costs, benefits, administrative feasibility, and spillover risks.

### Key analytical conclusions
- Historical evidence:
  - Advanced and emerging economies have intermittently used capital controls (inflows and outflows) as crisis-prevention and macroprudential tools across several decades.
- Misplaced stigma:
  - Inflow controls have an undeservedly bad name largely due to conflation with outflow controls and historical association with current account/exchange restrictions.
- Policy neutrality:
  - Inflow controls are neither inherently worse nor costlier than alternative measures; their suitability depends on country-specific circumstances and the availability/costs of other instruments.
- Decision framework:
  - Use a balanced assessment of country conditions, calibrate measures to the specific risks (composition, maturity, currency of flows), and avoid all-or-nothing stances on capital account openness.

*Source: _wp1625 - 1966. But the Paris riots in May 1968 forced the authorities to re-impose outflow controls,*

### REFERENCES

### REFERENCES

### Major topics and themes represented
- Capital controls, capital account liberalization, and capital flows.
- Historical evolution of international finance and balance of payments.
- Macroprudential policy, reserve requirements, and regulatory tools for managing capital inflows and outflows.
- The role of international institutions (IMF, League of Nations) and national policies in shaping cross-border financial regulation.
- Financial stability, externalities from capital flows, and firms acting as financial intermediaries.
- Legal and institutional frameworks governing the Fund and international monetary system.

### Prominent works and authors (selected items with publication details preserved)
- Abdelal, R., 2006, “Writing the Rules of Global Finance: France, Europe, and Capital Liberalization,” Review of International Political Economy, 13 (1): 1–27.
- Abdelal, R., 2007, Capital Rules (Cambridge, MA: Harvard University Press).
- Ariyoshi, A., K. Habermeier, B. Laurens, I. Ötker-Robe, J. Canales-Kriljenko, and A. Kirilenko, 2000, Capital Controls: Country Experiences with their Use and Liberalization, IMF Occasional Paper 190 (Washington DC: International Monetary Fund).
- Bianchi, J., 2011, “Overborrowing and Systemic Externalities in the Business Cycle,” American Economic Review, 101 (7): 3400–3426.
- Eichengreen, B., 1992, Golden Fetters (New York: Oxford University Press).
- Ghosh, A., J. Ostry, and M. Qureshi, 2016, “Why Do Capital Inflow Surges End in Tears?” American Economic Review Papers and Proceedings, forthcoming.
- Korinek, A., 2011, “The New Economics of Capital Controls,” IMF Economic Review, 59 (3): 523–561.
- Ostry, J., A. Ghosh, K. Habermeier, M. Chamon, M. Qureshi, and D. Reinhardt, 2010, “Capital Inflows: The Role of Controls,” IMF Staff Position Note 10/04 (Washington DC: International Monetary Fund).
- Ostry, J., A. Ghosh, M. Chamon, and M. Qureshi, 2012a, “Tools for Managing Financial-Stability Risks from Capital Inflows,” Journal of International Economics, 88 (2): 407–421.
- Stiglitz, J., 2002, “Capital Market Liberalization, Economic Growth, and Instability,” World Development, 28 (6): 1075-1086.
- Summers, L., 1998, “Building an International Financial Architecture for the 21st Century,” Remarks to the Cato Institute, 16th Annual Monetary Conference, Washington, DC, October 22, 1998.

### Institutional reports, working papers, and occasional papers (selected items with identifiers)
- IMF Working Paper WP/02/52 (Boughton, J., 2002).
- IMF Occasional Paper 190 (Ariyoshi et al., 2000).
- IMF Occasional Paper 214 (Bakker and Chapple, 2002).
- IMF Staff Papers (multiple entries, e.g., Dorrance and Brehmer, 1961; Goode and Thorn, 1959; Fleming, 1962).
- IMF Staff Position Note 10/04 (Ostry et al., 2010).
- IMF Staff Discussion Note SDN/12/10 (Ostry, Ghosh, and Korinek, 2012b).
- IMF Working Paper WP/14/188 (Ghosh, Qureshi, and Sugawara, 2014).
- NBER Working Paper 20612 (Federico, Vegh, and Vuletin, 2014).
- NBER Working Paper 18052 (Forbes et al., 2012).
- Bank of England Working Paper 524 (Danisewicz, Reinhardt, and Sowerbutts, 2015).
- CEPR Discussion Paper No. DP10926 (Caballero, Panizza, and Powell, 2015).
- DNB Working Paper No. 440 (Galati and Moessner, 2014).

### Historical coverage and periods emphasized
- Interwar period and lessons from the 1920s–1930s (League of Nations reports 1931, 1932, 1938, 1939; Einzig, 1934; Staley, 1935; Bloomfield, 1938).
- Bretton Woods and post-1945 international monetary system (Horsefield, 1969; Boughton, 2002; Solomon, 1982; Volcker and Gyohten, 1992).
- Late 20th century debates on capital-account convertibility and liberalization (Krugman, 1998; Rodrik, 1998; Dornbusch, 1998; Eichengreen, 1998).
- Recent analyses of capital flow management, macroprudential tools, and institutional views (IMF, 2010a; IMF, 2011a; IMF, 2012a; Ostry et al., 2011; Ostry et al., 2015).

### Recurring policy and analytical focal points
- Evaluation of capital controls’ effectiveness and design (Edwards, 1999; Magud and Reinhart, 2007; Kapstein, 1994).
- Tools for managing capital inflows and financial-stability risks (Ostry et al., 2012a; Ostry et al., 2011; Federico et al., 2014).
- Multilateral and legal aspects of capital flow policies and IMF mandate (IMF, 2010b; IMF, 2011c; Ostry, Ghosh, and Korinek, 2012b).
- Spillovers and externalities from national capital flow policies (Forbes et al., 2012; Jeanne and Korinek, 2010; Danisewicz et al., 2015).

*Content derived from the REFERENCES section of the source document.*

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