Pros and cons of capital controls in the presence of incomplete markets

This paper justifies the relevance of capital controls on the basis of markets' incompleteness, examines the pros and cons of restrictions on capital mobility, surveys the literature's recent attempts to assess the effectiveness of capital controls, and delineates the focal points of debate among researchers and policymakers. Additionally, the link between capital controls and financial stability is examined using frequency domain techniques. The study of the Chilean stock market and Peso-Dollar exchange rate fluctuations reveals that financial volatility due to irregular components increased after the removal of capital controls in September 1998.
1. Introduction Perhaps the most significant development in the world economy of the past several decades has been a rapid process of globalization and financial integration--the process spurred by the [...]