Rethinking the economics of capital mobility and capital controls

Abstract

This paper reexamines the issue of international financial capital mobility, which is today's economic orthodoxy. Discussion is often framed in terms of the impossible trinity. That framing distorts discussion by representing capital mobility as having equal significance with sovereign monetary policy and control over exchange rates. It also distorts discussion by ignoring possibilities for coordinated monetary policy and exchange rates, and for managed capital flows. The case for capital mobility rests on neo-classical economic efficiency arguments and neo-liberal political arguments. The case against capital mobility is based on Keynesian macroeconomic inefficiency arguments, neo-Walrasian market failure arguments, and neo-Marxian arguments regarding distortion of the social structure of accumulation. Close examination shows the case for capital mobility to be extremely flimsy, pointing to the ideological dimension behind today's policy orthodoxy.

Capital control reconsidered: financialisation and economic policy

“…We might consider why capital mobility is s thought to be beneficial. Palley (2009) outlines two categories of arguments-one based the neo-classical pursuit of an efficient resource allocation, another on a Hayekian preference for individual liberty over state activism-which he illustrates with the Figure 1. Palley (2009) notes that, from a neoclassical perspective, capital mobility, by increasing the range of investment opportunities, improves the efficiency of investment portfolios, and leads to a more efficient resource allocation and thus improves economic welfare.…”

“…Palley (2009) outlines two categories of arguments-one based the neo-classical pursuit of an efficient resource allocation, another on a Hayekian preference for individual liberty over state activism-which he illustrates with the Figure 1. Palley (2009) notes that, from a neoclassical perspective, capital mobility, by increasing the range of investment opportunities, improves the efficiency of investment portfolios, and leads to a more efficient resource allocation and thus improves economic welfare. Palley also stresses the claim made by mainstream economists that 'capital mobility fosters trade, FDI, technology transfer, global production chains, and financial development, and together this improves efficiency and growth' and contends that, 'from a conventional neo-classical perspective these developments increase global productive efficiency through application of the principle of comparative advantage, thereby benefitting all countries'.…”

Ruling capital: emerging markets and the reregulation of cross-border finance

“…Like economists in the Mundell tradition, the Minskian developmentalist literature also draws attention to the fact that free capital flows severely reduce the degrees of freedom for macroeconomic management and policy autonomy because sustaining private foreign capital inflows requires a strong exchange rate and high interest rates (Palley 2009). A high interest rate acts to discourage domestic investment, while an appreciating exchange rate reduces the competitiveness of the exports of a country.…”

Financial integration and national autonomy: China and India

“…However, as pointed out, 'the impossible trinity provides an incomplete policy menu that leaves a large part off the table. This omission includes (a) co-ordinated monetary policy across countries; (b) managed exchanged rates between countries; and (c) managed capital flows' (Palley 2009). A 'menu' such as the above, however, leaves much to be fulfilled, especially in the context of the current global financial scenario.…”

“…These constraints particularly include a loss of autonomy in their domestic monetary policy, resulting in what has been described in the literature as an 'impossible trilemma' (also named as an 'impossible trinity' by Thomas Palley (2009)). In terms of the latter, policy measures to maintain the three goals of exchange rate stability, capital account opening and monetary autonomy often turn out to be incompatible.…”