International Capital Transactions: Should They Be Restricted? International Capital Transactions: Should They Be Restricted?

March 31, 1994

Many countries have shifted toward freer markets in recent years. This shift is far from complete or free from backsliding, however. Moreover, a number of prominent economists contend that government restrictions should be maintained, or at least kept in reserve, for certain categories of transactions, such as international capital movements. In particular, it is sometimes argued that capital controls should be used to buttress the Exchange Rate Mechanism of the European Monetary System, which has been undermined by speculative attacks.

Following a capsule summary of the recent use of international capital restrictions, this article discusses their international acceptance, their theoretical justification, and their efficacy in attaining overall balance-of-payments or exchange rate goals. The author concludes that governments have had no more than fleeting and minor success in their use of capital controls in recent years.

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