Capital Controls in the 21st Century

Governments have rarely imposed or removed capital controls in response to short-term fluctuations in output, the terms of trade, or financial-stability considerations. We show empirically that controls on the international flow of financial capital are highly durable, often remaining in place for decades; their duration is striking compared with related phenomena such as exchange rate regimes. This represents a challenge to any proposed use of capital controls as an instrument of macroeconomic and macro-prudential management, since we have little experience in using capital controls at high- or medium frequencies. Any new policy initiative mandating frequent shifts in controls will be based on theory rather than data-driven experience.