Efficient capital controls

Abstract

Controls on short-term capital inflows or panic-driven capital outflows may benefit emerging markets that have fragile financial sectors and adjustable-peg currency regimes. However, the controls seen so far are relatively easy to evade, often complex and obscure, and supported by large corruptible bureaucracies. A tax on foreign-exchange payments avoids these drawbacks. It is transparent, inexpensive to set up and operate, administratively lean, and easy to adjust. A Tobin tax in effect, it is enforceable even when applied unilaterally.

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