Capital Controls
AdvancedCapital controls are measures taken by a government or central bank to limit the flow of money into or out of a country, such as taxes on foreign investment, limits on currency conversion or restrictions on moving funds abroad.
Governments use capital controls to manage risks from large and sudden capital flows. Controls on inflows aim to prevent excessive foreign money from causing asset bubbles or a sharply rising currency. Controls on outflows aim to stop capital flight during crises.
For example, during its financial crisis in 2015, Greece limited how much cash people could withdraw from banks and restricted transfers abroad, to prevent money from leaving the banking system. Iceland imposed capital controls after its banking collapse in 2008.
Capital controls can provide breathing space during a crisis and give policymakers more control over interest rates and exchange rates. However, they can discourage foreign investment, create inefficiencies, encourage evasion and damage confidence in the long term.
Views on capital controls have shifted over time. The International Monetary Fund, which once strongly favoured free capital movement, now accepts that controls can be appropriate in some circumstances, as part of a broader set of policies.
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