Capital controls (Cyprus)

Given the result of the negotiations over the Cypriot banking crisis, it is worth looking at capital controls in more detail. In class before spring break, we concluded that capital controls might become more relevant again, and the standard layout of the impossible trinity (with capital mobility as a default) might change.

In a post on the Financial Times website, you can read more about capital controls (free registration required). One link in this post worth checking out is to a NBER working paper by Magud, Reinhart, and Rogoff. The paper has a section on capital controls during the financial crisis in Malaysia that is quite relevant to what we discussed and to the Cypriot situation currently.

Update: An IMF paper by Ostry et al. presents more evidence on the effect of capital controls on capital inflows. For instance:

In general, capital controls are found to have little impact on the total volume of capital inflows and thus on currency appreciation. For example, the imposition of inflow restrictions by Brazil, Chile, and Colombia in the 1990s had no significant impact on total capital inflows, nor were pressures on the exchange rate alleviated (Figure 1). In fact, over the course of their capital controls, the real effective exchange rate appreciated by about 5 and 4 percent annually in Brazil and Chile, respectively. In Thailand, the real exchange rate started appreciating within a week after controls on short-term flows were imposed in December 2006. The most recent episode of controls in Colombia (during 2007–08) was also ineffective in reducing the volume of non-FDI inflows or in moderating the currency appreciation (Clements and Kamil, 2009).