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The Role of Preventative Capital Account Regulations

Working Paper #142

Gabriel Palma, José Antonio Ocampo

Paper  249kb pdf

Preventive capital account regulations have three potential roles in developing countries. First, as a macroeconomic policy tool they provide some room of manoeuvre for counter-cyclical macroeconomic policies, to help to cool aggregate demand and to avoid the accumulation of unsustainable debt burdens. Second, as a ‘liability policy’ they help to avoid risky corporate balance-sheet structures (excessive reliance on short-term external debts, maturity, and currency mismatches) and thus the worst effects of the volatility of capital inflows. Finally, capital controls help to avoid asset bubbles and thus prevent potential crashes. The experiences of Chilean, Colombian, and Malaysian regulations on capital inflows indicate that they fulfilled those key aims. However, the macroeconomic effects depended on the strength of the regulations and tended to be temporary. The basic advantage of the price-based instrument used by Chile and Colombia was its non-discretionary character, whereas quantity-based controls in Malaysia proved to be stronger in terms of short-term macroeconomic effects.

About the Authors

Gabriel Palma
University Lecturer
University of Cambridge

José Antonio Ocampo
Co-President
Initiative for Policy Dialogue (IPD)

Jose Antonio Ocampo is Co-President of IPD, Professor of Professional Practice in the School of International and Public Affairs, and Fellow of the Committee on Global Thought at Columbia University. Prior to his appointment at Columbia, Professor Ocampo served as the United Nations Under-Secretary-General for Economic and Social Affairs, and head of UN Department of Economic and Social Affairs (DESA), as Executive Secretary of the UN Economic Commission for Latin America and the Caribbean (ECLAC), and has held a number of high-level posts in the Government of Colombia, including Minister of Finance and Public Credit, Director of the National Planning Department, and Minister of Agriculture . Professor Ocampo is author or editor of over 30 books and has published over 200 scholarly articles on macroeconomic theory and policy, international financial issues, economic development, international trade, and Colombian and Latin American economic history.

Publication Information

Type Working Paper
Program Capital Market Liberalization
Posted 01/20/08
Download 249kb pdf
# Pages 30