chapter  18
19 Pages

The Obsolescence of Capital Controls? Economic Management in an Age of Global Markets

ByJOHN B. GOODMAN, LOUIS W. PAULY

The movement of capital across national borders has long raised sensitive political questions. Whatever the benefits, international investment complicates national economic management. Most research on this subject has focused on the causes and consequences of foreign direct investment. Less studied, but no less important, are short-term capital flows-those arising from the purchase or sale of financial instruments with maturities of less than one year. In contrast to investments in plant and equipment, short-term flows are highly sensitive to interest rate differentials and exchange rate expectations. Indeed, the mere announcement of a change in economic policy can trigger massive capital inflows or outflows, undermining the anticipated benefits of the new policy. For this reason, most governments regularly resorted to various types of controls on short-term capital movements in the decades following World War II.