The Role of Preventative Capital Account Regulations
Preventive capital account regulations have three potential roles in developing countries. First, as a macroeconomic policy tool they provide some room of manoeuvre for counter-cyclical macroeconomic policies, to help to cool aggregate demand and to avoid the accumulation of unsustainable debt burdens. Second, as a ‘liability policy’ they help to avoid risky corporate balance-sheet structures (excessive reliance on short-term external debts, maturity, and currency mismatches) and thus the worst effects of the volatility of capital inflows. Finally, capital controls help to avoid asset bubbles and thus prevent potential crashes. The experiences of Chilean, Colombian, and Malaysian regulations on capital inflows indicate that they fulfilled those key aims. However, the macroeconomic effects depended on the strength of the regulations and tended to be temporary. The basic advantage of the price-based instrument used by Chile and Colombia was its non-discretionary character, whereas quantity-based controls in Malaysia proved to be stronger in terms of short-term macroeconomic effects.
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