Currency Wars: Brazil-Style Capital Controls Have “Zero” Effect
There were ructions in the global financial markets when Brazil announced the start of the “currency wars” in 2010 and responded to monetary easing in the west by imposing capital controls in the form of extra taxes on foreign securities purchases.
South Korea, Peru and Thailand followed suit with actions of their own – all designed to cool inflows, calm markets and counter rapid currency appreciation.
But did it all have any effect? No, says a report this month from the Brookings Institution. The authors argue that the impact on capital flows, economies and exchange rates of such temporary controls is pretty much “zero”. With the Fed now launching a new round of monetary easing in the shape of QE3, the debate is anything but academic.
In the paper entitled Capital Controls: Gates and Walls, Professor Michael Klein of [The Fletcher School at] Tufts University argues that there is a clear difference between “long-standing capital controls” – as employed by China and India – and the temporary “episodic” capital controls that were implemented by Brazil and other countries after the 2008 financial crisis.
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