Domestic and Systemic Determinants of Capital Controls in the Developed and Developing World

Abstract

This paper examines the utility of and preference for controls on short-term capital. Recent work in international political economy has argued that the increasing internationalization of finance has constrained the ability of governments to pursue independent monetary policies. For the most part this conclusion has been reached through an examination of a small number of advanced industrialized countries. This article argues not only that the globalization of finance is far from all-encompassing but also that domestic forces play a more significant role in explaining the implementation and removal of capital controls than do systemic factors. Capital controls are more likely to be put in place by governments that repress the financial sector, that choose to maintain a fixed exchange rate, and that are facing balance-of-payments crises. These propositions are tested using a random effects probit model on a panel of ninety-one countries from 1967 to 1992.