Managing Capital Flows — Capital Controls and Foreign Exchange Intervention

Abstract

This chapter looks at the role of capital controls and foreign exchange market intervention within the policy toolkit for managing boom-bust cycles in capital flows. It considers the role of policies at the country level as well as the spillovers from those policies and the possible need for multilateral coordination. It argues that both types of policy have an important role to play, but that neither should substitute for warranted external adjustment nor be used to sustain misaligned currency values. Spillovers from the use of such policies are likely, but are not an argument against their use, per se. Nevertheless, when policy interventions themselves carry costs, coordination is likely to enhance global economic welfare, and may well need to include both source and recipient countries.