The Myth of Financial Protectionism: The New (and old) Economics of Capital Controls

Kevin Gallagher

Working Papers from Political Economy Research Institute, University of Massachusetts at Amherst

Abstract: Unstable global capital flows to developing countries have been characteristic of the world economy in the wake of the global financial crisis. The nations that have deployed capital controls to mitigate the negative effects of such flows have been branded as “protectionist” by some. This paper argues that such claims are unfounded. There is a longstanding strand of modern economic theory that dates back to Keynes and Prebisch and continues to this day that sees the use of capital controls as essential for macroeconomic stability and in order to deploy an independent monetary policy. In a most recent development, a “new welfare economics” of capital controls has arisen within the mainstream that sees controls as measures to correct for market failures due to imperfect information, contagion, uncertainty and beyond. Taken as a whole then, rather than the “new protectionism,” capital controls could be seen as the “new correctionism” that re-justifies a tool that has long been recognized to promote stability and growth in developing countries.

JEL-codes: E44 E5 F3 F30 F32 F34 F41 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-mac and nep-pke
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Citations: View citations in EconPapers (7)

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