Capital controls can be categorized by the type of asset they affect and the degree which that transaction is limited. Some economists argue that it is significant that capital controls are not exactl...
Capital controls can be categorized by the type of asset they affect and the degree which that transaction is limited. Some economists argue that it is significant that capital controls are not exactly the same as exchange restrictions, however, it is not significant for the discussion of whether or not this type of government intervention is appropriate.
Controls on inflows are often used to induce spending on domestic products and prevent a devaluation of domestic currency through increased balance of payments deficits. At the same time, controls on capital outflows prevent all investment money from going out of the country to investments viewed as being safer. By doing this, the country imposing capital controls will be able to tax interest income and generate revenue, as well as gain from domestic investment.
A second significant area of capital controls involves the control of prices and quantities. This occurs through taxing and quotas as a country taxes certain cross-boarder transactions, imposes mandatory reserve requirements, or sets ceilings on movement of certain assets. In some emerging economies, the governments have restricted repatriation of profits earned domestically by companies or regulated institutional investors’ portfolio contents. In either event, the controls keep capital in the domestic economy, and thus, are likely to be reinvested, create jobs, and be taxed.
Regardless of the actual methods of imposing capital controls, the goals ultimately remain the same. The domestic economy is intended to be shielded from crisis, and protected from an outflow of capital. Therefore capital control is essential part of national economy.