Short- and Long-Run Integration: Do Capital Controls Matter?

The recent turmoil in currency markets in Asia, Latin America, andEurope and the explosion of international capital flows that preceded these crises have ignited, once again, the debate on whether restrictions to international capital mobility can help reduce the perhaps excessive euphoria of investors, attenuate the severity of the crises, or limit contagion. Many have argued that globalization has gone too far, with international capital markets becoming extremely erratic after liberalization. One of the most ardent defend-ers of the old order has been Joseph Stiglitz, who, as the World Bank’s chief economist, clamored for developing countries to put some limits on capital inflows in order to moderate the excessive boom-bust pattern in financial mar-kets.1 Even controls on capital outflows, not long ago dismissed as ineffective, have become fashionable again. Paul Krugman, for instance, has argued that they may help in managing, at least temporarily, an otherwise disorderly retreat of investors.2 Others have challenged these views, arguing that financial repres-sion is a symbol of a bygone era that promotes corrupt and unstable financial systems and is incapable of preventing massive speculative capital attacks against the domestic currency.