What Is Capital Control?

Capital control represents any measure taken by a government, central bank, or other regulatory body to limit the flow of foreign capital in and out of the domestic economy. These controls include taxes, tariffs, legislation, volume restrictions, and market-based forces. Capital controls can affect many 𝔍asset classes such as equities, bonds, and foreign exchange trades.

Understanding Capital Controls

Capital controls are established to regulate financial flows from capital markets to and from a country's 澳洲幸运5官方开奖结果体彩网:capital account. These controls can be economy-wide or ꦚspecific to a sector or industry.🦩

Government monetary policy can enact capital control. This strategy may restrict the ability of domestic citizens to acquire foreign assets, referred to as capital outflow controls, or foreigners' ability to buy domestic assets, known as capital inflow controls.

Tight controls are most often found in 澳洲幸运5官方开奖结果体彩网:developing economies. They are crucial to the development of these markets because 澳洲幸运5官方开奖结果体彩网:capital reserves are lower and often more susceptible to volatility. A developing economy's currency can depreciate when disrupti🥃ons occur from capital outflows. Capital controls can help reduce these unpredictable 💞changes in currency rates in the foreign exchange market.

The Debate Over Capital Controls

Critics believe capital controls inherently limit economic progress and 澳洲幸运5官方开奖结果体彩网:efficiency while proponents consider them prudent because they increase the safety of the economy. Most of the world's largest econom🌱ies have liberal capitalꩵ control policies and have phased out stricter rules from the past.

However, most of these same economies have necessary stopgap measures in place to prevent a mass exodus of capital outflows during a time of crisis or a massive speculative assault on the currency. Factors such as 澳洲幸运5官方开奖结果体彩网:globalization and the integration of 澳洲幸运5官方开奖结果体彩网:financial markets have contributed to an overall easing of capit♕al controls.

Opening up an economy to foreign capital typically provides companies wit✅h easier access to funds and can raise the overall demand for domestic stocks.

Example of Capital Control

Capital controls are often established after an economic crisis to prevent domestic citizens and foreign investors from extracting funds from a country. For example, at the end of June 2015, the European Central Bank froze support to Greece during the 澳洲幸运5官方开奖结果体彩网:European sovereign debt crisis.

Greece responded by closing its banks and implementing capital controls from June 29 through July 20, 2015, out of fear that Greek citizens would initiate a run on domestic banks. The monetary capital controls put limits on allowable daily cash withdrawals at banks and placed restrictions on money transfers and overseas credit card payments.

On July 22, 2016, Greece's Finance Minister reported that the country would ease its capital controls to increase confidence in Greek banks. The easing was expected to increase the amount of money held at Greek banks.

According to The Guardian, while Greece was putting the worst of the economic crisis behind it as it exited the bailout program. The government loosened the limits on cash withdrawals and increased the allowance for business cash transfers.

The Bottom Line

Capital controls are designed to regulate the flow of capital in and out of a country's capital accounts. Governments, central banks, and other regulatory bodies may use these controls to limit volatility in currency rates and the risks of economic crises. But, there are downsides, too. Seen as a way to stifle economic growth, critics state that capital controls may lead to corruption and can often spell bad news for investors.