Resurgent Capital Flows to Developing Countries: Policies to Improve Their Impact

Policy Brief Number 10
June 2013

Resurgent Capital Flows to Developing Countries: Policies to Improve Their Impact

Author: James A. Hanson

This policy note comments on the resurgence of capital inflow controls and suggests that in many cases, greater reliance on the foreign exchange market may be more effective in limiting volatile hot-money inflows and disruptions. In mid-2013, the evidence suggested that capital controls implemented while maintaining the exchange rate and sterilizing central bank purchases of foreign exchange via monetary policy does not reduce inflows much, and may even encourage them, while complicating macroeconomic management. Other, less costly policies may be used to offset costs of a more variable exchange rate.