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"Capital controls may be defined as restrictions designed to affect the capital account of a country's balance of payments. Put simply, capital controls imply measures that restrict or prohibit the cross border movement of capital including restrictions on both inflows and outflows. Those would, in turn, include prohibitions; need for prior approval; authorization and notification; multiple currency practices; discriminatory taxes; and reserve requirements or interest penalties imposed by the authorities that regulate the conclusion or execution of transactions. Capital controls can be quantity-based, price-based or regulatory. Quantity-based controls involve explicit limits or prohibitions on capital account transactions. Such quantity-based misures on inflows may include a ban on investment in money market instruments, limits on short-term borrowing, restrictions on certain types of securities that can be owned, etc. On outflows, quantity-based controls can take the form of explicit moratorium. Price-based controls seek to alter the cost of capital transaction with a view to discouraging a certain class of flows and encouraging another set of flows. Price-based controls on inflows can take the form of a tax on stock market purchases, certain foreign exchange transactions, etc. Price-based controls on outflows can typically take the form of an exit tax. Regulatory controls can be both price-based and quantity-based and such a policy package usually treats transactions with non-residents less favourably than with residents. An unremunerated reserve requirement is an example of regulatory controls on inflows. Reserve requirements can be imposed with differentiation between domestic and foreign currency to influence liquidity and to either encourage or discourage foreign currency deposits." |
Singh, Kavaljit:
'Taming Global Financial Flows. A Citizen's Guide' |