Description
Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account.
Study Reports on Capital controls in Iceland
Does anybody know what is goingtohappen?
why it is interesting:
• • • •
Economic theory: opened question
- Capital mobility adv/disadvant (Obstfeldt and Taylor, 2004) - Why do Governments impose controls? (Alesina et al., 1993; Dooley, 1995)
Empirical analysis: opened question
- Difficulties: Hetherogeneity (methodolog., study cases, different capital flows) - Few agreement, huge disagreement (Rodrik, 1998; Prasad et al, 2003, Kose et al, 2006; Henry, 2007)
Capital controls: policy tool currently used
- Malaysia and Chile: most famous examples - Now: Thailand, Brasil, Indonesia, South Korea - IMF: its position has evolved (Iceland is the best example)
Iceland: good study case
Tough capital controls on outflows In force for more than 3 years Important for economic recovery "Iceland's way" to face crisis deserve attention
Purpose
• Reflection on Iceland's capital controls • Literature: discussion's starting point • Caveats
- Not comprehensive - Study case still evolving: many uncertainties
Structure
• Context and capital controls description • Determinants • Effects • Costs • Challenging liberalization • Final remarks
Context • Imposed on 10-October-2008 • IMF Stand-By Agreement
- Legitimates capital controls: "needed tool" Main goal: avoid further ISK depreciation
• Outflows
- Residentes: not alloew to purchase foreign currency to perform any financial operation - Non residentes: not allowed to take investments out
• Inflows: free but? • Current account transactions: no restrictions
Context
•
Liberalization strategy ongoing
- Main goal: safeguard financial stability (= avoid capital flight) - Problem: non-resident investors with short term assets worth 25% GDP - Proceeding slowly so far
• • • •
Financial sector reestructured
- Cost = 43% GDP - Main bank: 81% public.
Progressive fiscal reform Main pillars of welfare state maintained Incipient economic recovering
10.00 8.00 6.00 4.00 2.00 0.00 1998 -2.00 -4.00 -6.00 -8.00
GDP (real growth, %)
2000
2002
2004
2006
2008
2010
Source: Central Bank of Iceland. Economic Indicators
Exchange rate (ISK/EUR)
360 340 320 300 280 260 240 220 200 180 160 140 120 100 80 Jan-08 Apr-08 Jul-08
Oct-08 Jan-09 Apr-09 Jul-09
Oct-09 Jan-10 Apr-10 Jul-10
Oct-10 Jan-11 Apr-11 Jul-11
Oct-11
Off s h o r e
On s h o r e
Source: Central Bank of Iceland. Economic Indicators
General government gross debt
120.0 100.0 80.0
60.0 40.0 20.0 0.0 00 01 02 03 04 05 06 07 08 09 10 11
Source: Central Bank of Iceland. Economic Indicators
Determinants: why capital controls?
• • • • • •
Different starting points from literature Curative or preventive controls (Edwards,1999)
?? ??
To gain monetary policy independence (Krugman,1998; Grabel,2003)
To "buy time": dealy unavoidable and needed changes on economy, thus
maintaining inefficiencies (Edwards,1999;Battilossi,2005) ??
Government's "fears" (Magud and Reinhardt, 2006) Does this fit to Iceland?
??
- Curative controls - Fear (depreciation, loosing monetary independence) YES - Delay "unavoidable changes" NO
Effects: what we see
1. Uncertainty: would recovery vanish without capital controls? 2. Exchange rate stabilization 3. Off-shore ISK market 4. Lower interest rates 5. Cheaper public debt (capital controls+other factors) 6. Overall effect: sustaining economic recovery
Central Bank interest rates
25.00
Overnight loan discount rates
20.00
15.00
10.00
Loan against collateral (nominal rate)
5.00
Current account
0.00
Source: Central Bank of Iceland. Interest Rates
Treasury debt. Yields on primary market
18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 2008 2009 2010 2011 2012
3 months
Source: Government Debt Management
1 year
10-11 years
Treasury Bonds. Yields on secondary market
20.00
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00 Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
R I K B 13 05 17
RIKB 16 1013
RIKB 19 0226
R I K B 3 1 0 124
Source: Central Bank of Iceland. Interest Rates
How public debt market works
Primary market: yields?
Capital controls
Bank's partial nationalization
Market makers close to Government
Secondary market: yields?
Investors not allowed to invest abroad
Domestic scenario: few alternatives to public debt
Effects: cheaper public debt on literature
• Related to financial repression (Giovannini and De Melo,
1993; Roubini and Sala-i-Martín, 1995)
• Empirical analysis: financial repression implies (Alesina et al.,
1993; Reinhardt and Rogoff, 2009):
- Public debt cost?Public debt stock?
• Theoretical approach: capital controls as a second-best
1995)
taxation option if important distortions on fiscal or politics environment (Aizenman and Guidotti, 1990; Roubini and Sala-i-Martín,
• Does this fit to Iceland?
- Effect (cheaper public debt) YES - Determinants (distortions) NO
Capital controls and economic recovery
• Iceland: capital controls sustaining financial
delicate equilibrium during incipient recovery
• This effect is not captured by analizing individual
macro variables
Viable banks
Iceland's "trilemma"
Ec. Recovery
Public accounts sustainability
Cheap public debt
Households deleveraging (other)
Capital controls
Costs (1): benefits not available
Restrictions due to capital controls
(Obstfeld and Taylor, 2004)
How important they are in the case of Iceland (maybe) greater avoided outflows
Limited inflows (maybe) main risks avoided (depreciation and enormous public debt increase) Does optimal individual behavior lead to an optimal result for the whole economy ? Which are those in Iceland? Welfare state? Reintroduced wealth tax?
Poor risk management
Sub-optimal saving allocation
Maintenance of unsensible policies
Costs (2): damages
• Opportunity costs: because capital controls are innefective
due to lack of institutional capabilities (Edwards, 1999)
NO
(Edwards, 1999;
• Corruption: inherent to any bureaucratic scheme
Krugman, 1998)
?? ??
• Efforts to evade controls (Forbes, 2006):
- Off-shore ISK market - Non-resident investors with short term maturity products
• Costs increase as controls are reinforced: ??
Liberalization challenges economic recovery
• Potential damages
- Capital flight - Debt sustainability - Economic recovery: "trilemma" equilibrium at risk
• Resistances:
if
institutions
captured
by
capital
control
bureaucracy (Dooley, 1995) - Reasons to worry? Uncertain
• Government's will
- Explicit will to remove controls - Incentives not to do it - Tricky issue: uncertain scenarios, no guarantee of success. When is the right moment to remove controls?
Final remarks
1. Capital controls in Iceland: very particular case
Rich country Curative, tough controls (becoming stronger) More than 3 years in force Backed unprecedently by IMF
1. Difficult issue to address
Still evolving Literature
• •
No approach fitting reasonably in Iceland Individual questions (effects, determinants) identified, but connected to REALLY DIFFERENT cases from both economic and politics point of view
Final remarks
3. Have capital controls been useful?
Intrinsic value: it provides Governement with policy space
(Krugman, 1998; Grabel, 2003)
-
Diagnosis? It will depend on how are they used Pesimistic literature about capital controls "in practice" does not seem to apply here Quite useful in making feasible current scenario of incipient recovery Costs? Sure, but?what about alternatives costs? (Grabel, 2003)
-
-
Final remarks
4. Uncertainties
• • •
Costs of financial crash delayed but not avoided? Huge uncertainty, but?is there any centainty at all? (look at EURO area) At least, capital controls have contributed to a better present scenario a better starting point to face uncertain future
Már Guðmundsson Governor of Iceland's Central Bank
Lifting the restrictions on capital outflows is one of the most complex tasks facing the Icelandic authorities at present (Guðmundsson,2012b:5)
The future evaluation of the "Icelandic model" will depend in part on the success of this process (Guðmundsson,2012:12)
Thank you
References
• • • • • • • • •
Aizenman, Joshua y Pablo E. Guidotti (1990). Capital controls, collection costs, and domestic public debt. NBER Working Paper Series. Working Paper nº 3443. National Bureau of Economic Research. Cambridge. Massachusets. Aizenman, Joshua and Brian Pinto (2011b). "Managing Financial Integration and Capital Mobility: Policy Lessons from the Past Two Decades". World Bank Policy Research Working Paper 5786. Alesina, Alberto, Vitorio Grilli y Gian Maria Milesi-Ferretti (1993). The political economy of capital controls. NBER Working Paper Series. Working Paper nº 4353. National Bureau of Economic Research. Cambridge. Massachusets. Battilossi, Stefano (2003). Capital mobility and financial repression in Italy, 1960-1990: a public finance perspective. Woeking Paper 03-06. Economic History and Institutions Series 02. Febrero de 2003. Universidad Carlos III de Madrid. Getafe. Dooley, Michael P. (1995). A surveyof academic literature on conrols over international capital transactions. NBER Working Paper Series. Working Paper nº 5352. National Bureau of Economic Research. Cambridge. Massachusets. Edwards, Sebastian (1999). "How effective are capital controls?" Journal of economic perspectives, Volume 13, nº 14 - Otoño 1999 - 65-84. Forbes, Kristin J. (2006). Capital Controls. Submission for Palgrave's Dictionary of Economics, 2nd edition. Giovannini, Alberto y Martha de Melo (1993). "Government revenues from financial repression". American Economic Review, 83, n. 4, 953-63. Grabel, Ilene (2003). "Averting Crisis? Assessing Measures to Manage Financial Integration in Emerging
Economies". Cambridge Journal of Economics 27 (3):317-336.
References
• • • • • • • • •
Guðmundsson, Már (2012). Reflections on the "Icelandic model" for crisis mangement and recovery. Már Guðmundsson, Governor of the Central Bank of Iceland. Speech at an Adam Smith Seminar named: 2012 and Beyond. World Economic Prospects, in Paris on 7 March 2012. The Central Bank of Iceland. Reykjavik. Guðmundsson, Már (2012b). Speech delivered at the 51st Annual General Meeting of the Central Bank of Iceland, 29 March 2012. Már Guðmundsson, Governor of the Central Bank of Iceland. The Central Bank of Iceland. Reykjavik. Henry, Peter Blair (2007) "Capital Account Liberalization: Theory, Evidence, and Speculation," Journal of Economic Literature 45: 887-935. Kose, M. Ayhan, Eswar Prasad, Kenneth Rogoff and Shang-Jin Wei (2006). Financial Globalization: A Reappraisal. National Bureau of Economic Research. Working Paper n. 12484. Cambridge, Massachusetts. Krugman, Paul (1998). "Saving Asia: it's time to get radical". Fortune. September 7, p.74-80. Magud, Nicolas y Carmen M. Reinhardt (2006). Capital controls: an evaluation. National Bureau of Economic Research. Working Paper n. 11973. Cambridge, Massachusetts. Obstfeld, Maurice, Alan M. Taylor (2004). Global capital markets : integration, crisis, and growth. Cambridge University Press. Cambridge Prasad, Eswar, Kenneth Rogoff, Shang-Jin Wei y M. Ayhan Kose (2003). Effects of financial globalization on developing countries: some empirical evidence. International Monetary Fund. Reinhart, Carmen y Kenneth S. Rogoff (2009), This time is different: eigth centuries of financial folly, Princeton University Press, Princeton, N. J.
References
• •
Rodrik, Dani (1998). Who needs capital account convertibility? Contribution to a symposium edited by Peter Kenen, to be published as part of a Princeton Essay in International Finance. Roubini, Nuriel y Xavier Sala-i-Martín (1995), "A growth model of inflation, tax evasion and financial repression", Journal of Monetary Economics, 35: 275-301.
doc_600077716.docx
Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account.
Study Reports on Capital controls in Iceland
Does anybody know what is goingtohappen?
why it is interesting:
• • • •
Economic theory: opened question
- Capital mobility adv/disadvant (Obstfeldt and Taylor, 2004) - Why do Governments impose controls? (Alesina et al., 1993; Dooley, 1995)
Empirical analysis: opened question
- Difficulties: Hetherogeneity (methodolog., study cases, different capital flows) - Few agreement, huge disagreement (Rodrik, 1998; Prasad et al, 2003, Kose et al, 2006; Henry, 2007)
Capital controls: policy tool currently used
- Malaysia and Chile: most famous examples - Now: Thailand, Brasil, Indonesia, South Korea - IMF: its position has evolved (Iceland is the best example)
Iceland: good study case
Tough capital controls on outflows In force for more than 3 years Important for economic recovery "Iceland's way" to face crisis deserve attention
Purpose
• Reflection on Iceland's capital controls • Literature: discussion's starting point • Caveats
- Not comprehensive - Study case still evolving: many uncertainties
Structure
• Context and capital controls description • Determinants • Effects • Costs • Challenging liberalization • Final remarks
Context • Imposed on 10-October-2008 • IMF Stand-By Agreement
- Legitimates capital controls: "needed tool" Main goal: avoid further ISK depreciation
• Outflows
- Residentes: not alloew to purchase foreign currency to perform any financial operation - Non residentes: not allowed to take investments out
• Inflows: free but? • Current account transactions: no restrictions
Context
•
Liberalization strategy ongoing
- Main goal: safeguard financial stability (= avoid capital flight) - Problem: non-resident investors with short term assets worth 25% GDP - Proceeding slowly so far
• • • •
Financial sector reestructured
- Cost = 43% GDP - Main bank: 81% public.
Progressive fiscal reform Main pillars of welfare state maintained Incipient economic recovering
10.00 8.00 6.00 4.00 2.00 0.00 1998 -2.00 -4.00 -6.00 -8.00
GDP (real growth, %)
2000
2002
2004
2006
2008
2010
Source: Central Bank of Iceland. Economic Indicators
Exchange rate (ISK/EUR)
360 340 320 300 280 260 240 220 200 180 160 140 120 100 80 Jan-08 Apr-08 Jul-08
Oct-08 Jan-09 Apr-09 Jul-09
Oct-09 Jan-10 Apr-10 Jul-10
Oct-10 Jan-11 Apr-11 Jul-11
Oct-11
Off s h o r e
On s h o r e
Source: Central Bank of Iceland. Economic Indicators
General government gross debt
120.0 100.0 80.0
60.0 40.0 20.0 0.0 00 01 02 03 04 05 06 07 08 09 10 11
Source: Central Bank of Iceland. Economic Indicators
Determinants: why capital controls?
• • • • • •
Different starting points from literature Curative or preventive controls (Edwards,1999)
?? ??
To gain monetary policy independence (Krugman,1998; Grabel,2003)
To "buy time": dealy unavoidable and needed changes on economy, thus
maintaining inefficiencies (Edwards,1999;Battilossi,2005) ??
Government's "fears" (Magud and Reinhardt, 2006) Does this fit to Iceland?
??
- Curative controls - Fear (depreciation, loosing monetary independence) YES - Delay "unavoidable changes" NO
Effects: what we see
1. Uncertainty: would recovery vanish without capital controls? 2. Exchange rate stabilization 3. Off-shore ISK market 4. Lower interest rates 5. Cheaper public debt (capital controls+other factors) 6. Overall effect: sustaining economic recovery
Central Bank interest rates
25.00
Overnight loan discount rates
20.00
15.00
10.00
Loan against collateral (nominal rate)
5.00
Current account
0.00
Source: Central Bank of Iceland. Interest Rates
Treasury debt. Yields on primary market
18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 2008 2009 2010 2011 2012
3 months
Source: Government Debt Management
1 year
10-11 years
Treasury Bonds. Yields on secondary market
20.00
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00 Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
R I K B 13 05 17
RIKB 16 1013
RIKB 19 0226
R I K B 3 1 0 124
Source: Central Bank of Iceland. Interest Rates
How public debt market works
Primary market: yields?
Capital controls
Bank's partial nationalization
Market makers close to Government
Secondary market: yields?
Investors not allowed to invest abroad
Domestic scenario: few alternatives to public debt
Effects: cheaper public debt on literature
• Related to financial repression (Giovannini and De Melo,
1993; Roubini and Sala-i-Martín, 1995)
• Empirical analysis: financial repression implies (Alesina et al.,
1993; Reinhardt and Rogoff, 2009):
- Public debt cost?Public debt stock?
• Theoretical approach: capital controls as a second-best
1995)
taxation option if important distortions on fiscal or politics environment (Aizenman and Guidotti, 1990; Roubini and Sala-i-Martín,
• Does this fit to Iceland?
- Effect (cheaper public debt) YES - Determinants (distortions) NO
Capital controls and economic recovery
• Iceland: capital controls sustaining financial
delicate equilibrium during incipient recovery
• This effect is not captured by analizing individual
macro variables
Viable banks
Iceland's "trilemma"
Ec. Recovery
Public accounts sustainability
Cheap public debt
Households deleveraging (other)
Capital controls
Costs (1): benefits not available
Restrictions due to capital controls
(Obstfeld and Taylor, 2004)
How important they are in the case of Iceland (maybe) greater avoided outflows
Limited inflows (maybe) main risks avoided (depreciation and enormous public debt increase) Does optimal individual behavior lead to an optimal result for the whole economy ? Which are those in Iceland? Welfare state? Reintroduced wealth tax?
Poor risk management
Sub-optimal saving allocation
Maintenance of unsensible policies
Costs (2): damages
• Opportunity costs: because capital controls are innefective
due to lack of institutional capabilities (Edwards, 1999)
NO
(Edwards, 1999;
• Corruption: inherent to any bureaucratic scheme
Krugman, 1998)
?? ??
• Efforts to evade controls (Forbes, 2006):
- Off-shore ISK market - Non-resident investors with short term maturity products
• Costs increase as controls are reinforced: ??
Liberalization challenges economic recovery
• Potential damages
- Capital flight - Debt sustainability - Economic recovery: "trilemma" equilibrium at risk
• Resistances:
if
institutions
captured
by
capital
control
bureaucracy (Dooley, 1995) - Reasons to worry? Uncertain
• Government's will
- Explicit will to remove controls - Incentives not to do it - Tricky issue: uncertain scenarios, no guarantee of success. When is the right moment to remove controls?
Final remarks
1. Capital controls in Iceland: very particular case
Rich country Curative, tough controls (becoming stronger) More than 3 years in force Backed unprecedently by IMF
1. Difficult issue to address
Still evolving Literature
• •
No approach fitting reasonably in Iceland Individual questions (effects, determinants) identified, but connected to REALLY DIFFERENT cases from both economic and politics point of view
Final remarks
3. Have capital controls been useful?
Intrinsic value: it provides Governement with policy space
(Krugman, 1998; Grabel, 2003)
-
Diagnosis? It will depend on how are they used Pesimistic literature about capital controls "in practice" does not seem to apply here Quite useful in making feasible current scenario of incipient recovery Costs? Sure, but?what about alternatives costs? (Grabel, 2003)
-
-
Final remarks
4. Uncertainties
• • •
Costs of financial crash delayed but not avoided? Huge uncertainty, but?is there any centainty at all? (look at EURO area) At least, capital controls have contributed to a better present scenario a better starting point to face uncertain future
Már Guðmundsson Governor of Iceland's Central Bank
Lifting the restrictions on capital outflows is one of the most complex tasks facing the Icelandic authorities at present (Guðmundsson,2012b:5)
The future evaluation of the "Icelandic model" will depend in part on the success of this process (Guðmundsson,2012:12)
Thank you
References
• • • • • • • • •
Aizenman, Joshua y Pablo E. Guidotti (1990). Capital controls, collection costs, and domestic public debt. NBER Working Paper Series. Working Paper nº 3443. National Bureau of Economic Research. Cambridge. Massachusets. Aizenman, Joshua and Brian Pinto (2011b). "Managing Financial Integration and Capital Mobility: Policy Lessons from the Past Two Decades". World Bank Policy Research Working Paper 5786. Alesina, Alberto, Vitorio Grilli y Gian Maria Milesi-Ferretti (1993). The political economy of capital controls. NBER Working Paper Series. Working Paper nº 4353. National Bureau of Economic Research. Cambridge. Massachusets. Battilossi, Stefano (2003). Capital mobility and financial repression in Italy, 1960-1990: a public finance perspective. Woeking Paper 03-06. Economic History and Institutions Series 02. Febrero de 2003. Universidad Carlos III de Madrid. Getafe. Dooley, Michael P. (1995). A surveyof academic literature on conrols over international capital transactions. NBER Working Paper Series. Working Paper nº 5352. National Bureau of Economic Research. Cambridge. Massachusets. Edwards, Sebastian (1999). "How effective are capital controls?" Journal of economic perspectives, Volume 13, nº 14 - Otoño 1999 - 65-84. Forbes, Kristin J. (2006). Capital Controls. Submission for Palgrave's Dictionary of Economics, 2nd edition. Giovannini, Alberto y Martha de Melo (1993). "Government revenues from financial repression". American Economic Review, 83, n. 4, 953-63. Grabel, Ilene (2003). "Averting Crisis? Assessing Measures to Manage Financial Integration in Emerging
Economies". Cambridge Journal of Economics 27 (3):317-336.
References
• • • • • • • • •
Guðmundsson, Már (2012). Reflections on the "Icelandic model" for crisis mangement and recovery. Már Guðmundsson, Governor of the Central Bank of Iceland. Speech at an Adam Smith Seminar named: 2012 and Beyond. World Economic Prospects, in Paris on 7 March 2012. The Central Bank of Iceland. Reykjavik. Guðmundsson, Már (2012b). Speech delivered at the 51st Annual General Meeting of the Central Bank of Iceland, 29 March 2012. Már Guðmundsson, Governor of the Central Bank of Iceland. The Central Bank of Iceland. Reykjavik. Henry, Peter Blair (2007) "Capital Account Liberalization: Theory, Evidence, and Speculation," Journal of Economic Literature 45: 887-935. Kose, M. Ayhan, Eswar Prasad, Kenneth Rogoff and Shang-Jin Wei (2006). Financial Globalization: A Reappraisal. National Bureau of Economic Research. Working Paper n. 12484. Cambridge, Massachusetts. Krugman, Paul (1998). "Saving Asia: it's time to get radical". Fortune. September 7, p.74-80. Magud, Nicolas y Carmen M. Reinhardt (2006). Capital controls: an evaluation. National Bureau of Economic Research. Working Paper n. 11973. Cambridge, Massachusetts. Obstfeld, Maurice, Alan M. Taylor (2004). Global capital markets : integration, crisis, and growth. Cambridge University Press. Cambridge Prasad, Eswar, Kenneth Rogoff, Shang-Jin Wei y M. Ayhan Kose (2003). Effects of financial globalization on developing countries: some empirical evidence. International Monetary Fund. Reinhart, Carmen y Kenneth S. Rogoff (2009), This time is different: eigth centuries of financial folly, Princeton University Press, Princeton, N. J.
References
• •
Rodrik, Dani (1998). Who needs capital account convertibility? Contribution to a symposium edited by Peter Kenen, to be published as part of a Princeton Essay in International Finance. Roubini, Nuriel y Xavier Sala-i-Martín (1995), "A growth model of inflation, tax evasion and financial repression", Journal of Monetary Economics, 35: 275-301.
doc_600077716.docx