| NEW YORK, April 13
NEW YORK, April 13 Capital controls have a
place, albeit a limited one, in helping emerging markets
protect themselves from the cash flood of developed market
economic stimulus, the IMF said in a study on Tuesday.
In the International Monetary Fund's global financial
stability report, capital controls were deemed a complementary
policy in a government's toolkit for dealing with surges of
capital that can disrupt exchange rates or asset prices.
While the IMF has given credence to the use of capital
controls in the recent past, they caution sovereign governments
not to rely on them to be a long-term solution for limiting big
swings in cash either into or out of their markets.
Rather than using a myriad different controls, the IMF put
a flexible exchange rate policy at the top of a list of
measures nations should use to limit financial market risks.
"When these policy measures are not sufficient and capital
inflow surges are likely to be temporary, capital controls may
have a role in complementing the policy toolkit," it said.
In an effort to protect their domestic markets and export
businesses, a tax, higher reserve requirements, or outright
limits on capital movement were used in countries such as
Brazil, Colombia, South Korea, Thailand and Turkey.
The debate over capital controls came to a head as a result
of the current financial crisis when developed rather than
emerging nations pumped massive amounts of cash into their
financial markets in order to stave off economic collapse.
Emerging markets ended up on the receiving end of a
significant portion of the money that sloshed around the global
financial system as investors sought solid returns.
These countries by and large had shorter and less severe
economic downturns, offering better economic prospects and
higher interest rates compared to their more mature peers.
Their economic growth attracted excessive capital flows,
swelling demand and outstripping supply, thereby bloating asset
prices and the value of national currencies.
The IMF's study found mixed results on using capital
controls. In some cases they "lengthen the maturity of inflows
and create some room for monetary independence."
However, even if the controls provided relief, the IMF said
the effect was typically temporary, and often the impact on
cash flows proved statistically insignificant.
"Controls tend to lose effectiveness over time, as market
participants find ways to circumvent them," the IMF said,
citing the conclusions of recent economic research that was
broadly consistent with earlier findings.
The controls can also prove to be an economic crutch.
"A widespread reliance on capital controls may delay
necessary macroeconomic adjustments in individual countries
and, in the current environment, prevent the global rebalancing
of demand and thus hinder the recovery of global growth," the