A usual argument against the use of capital controls as a prudential measure is that it is always better to tackle problems at their source rather than trying to deal with symptoms. This is called the principle of economic targeting in Economics, one of the discipline’s most powerful teachings. The problem with indirect remedies is that they create problems themselves, “by-product distortions” in Econ-speak. With capital controls, those would be corruption and the discouragement of trade and other flows that are not necessarily a problem.
Hyun Song Shin essentially relies on this principle when he argues against capital controls (in a speech yesterday in Washington, DC):
The lesson is to distinguish underlying causes from outward symptoms. Yes, the 2008 financial crisis was in largeRead More »