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Capital controls and international interest rate differentials

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  • Makram El-Shagi

Abstract

Since the Asian crises it is often taken as granted that capital markets have significant functional deficits. Often these deficits are believed to be so very strong that the ability of free capital markets to guarantee a more or less correct international allocation of capital is denied. It is argued that speculation dominates capital markets so much that capital allocation is purely random. This is one of the major arguments backing the present trend to re-establish capital controls, which emerged after the capital market distortions observed during the Asian flu. In the present article it is shown that capital markets, while certainly prone to many distortions, are well capable of roughly guiding capital to the proper place. Though allocation is not model-like perfect, this steals the thunder from the idea, that closed or government-guided capital markets were able to perform better.

Suggested Citation

  • Makram El-Shagi, 2010. "Capital controls and international interest rate differentials," Applied Economics, Taylor & Francis Journals, vol. 42(6), pages 681-688.
    • Handle: RePEc:taf:applec:v:42:y:2010:i:6:p:681-688
    DOI: 10.1080/00036840701720770
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    References listed on IDEAS

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    1. Kristin J. Forbes, 2004. "Capital Controls: Mud in the Wheels of Market Discipline," NBER Working Papers 10284, National Bureau of Economic Research, Inc.
    2. Alberto Alesina & Vittorio Grilli & Gian Maria Milesi-Ferretti, 1993. "The Political Economy of Capital Controls," NBER Working Papers 4353, National Bureau of Economic Research, Inc.
    3. Wyplosz, Charles, 1999. "Financial Restraints and Liberalization in Postwar Europe," CEPR Discussion Papers 2253, C.E.P.R. Discussion Papers.
    4. Takatoshi Ito, 1983. "Capital Controls and Covered Interest Parity," NBER Working Papers 1187, National Bureau of Economic Research, Inc.
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    Cited by:

    1. El-Shagi Makram, 2012. "The Distorting Impact of Capital Controls," German Economic Review, De Gruyter, vol. 13(1), pages 41-55, February.
    2. Makram El-Shagi, 2012. "Initial Evidence from a New Database on Capital Market Restrictions," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(3), pages 283-292, June.

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