What is 'Capital Control'?

Capital control represents any measure taken by a government, central bank or other regulatory body to limit the flow of foreign capital in and out of the domestic economy. These controls include taxes, tariffs, outright legislation, volume restrictions and market-based forces. Capital controls can affect many asset classes such as equities, bonds and foreign exchange trades.

BREAKING DOWN 'Capital Control'

Capital controls are established to regulate financial flows from capital markets into and out of a country's capital account. These controls can be economy-wide or specific to a sector or industry. Capital controls are enacted by government policy and can restrict the ability of domestic citizens to acquire foreign assets, referred to as capital outflow controls, or the ability of foreigners to acquire domestic assets, known as capital inflow controls. Tight controls are most often found in developing economies where the capital reserves are lower and more susceptible to volatility.

The Debate over Capital Controls

Capital controls are the subject of much debate. Critics believe that they inherently limit economic progress and efficiency while proponents consider them prudent because they increase the safety of the economy. Most of the largest economies have liberal capital control policies and have phased out stricter rules from the past.

However, most of these same economies have basic stopgap measures in place to prevent a mass exodus of capital outflows during a time of crisis or a massive speculative assault on the currency. Global factors such as globalization and the integration of financial markets have contributed to an overall easing of capital controls. Opening up an economy to foreign capital typically provides companies with easier access to capital and can raise overall demand for domestic stocks.

An Example of Capital Controls

Capital controls are often established after an economic crisis to prevent domestic citizens and foreign investors from extracting funds from a country. For example, the European Central Bank (ECB), on June 29, 2015, froze support to Greek during the European sovereign debt crisis. Greece responded by closing its banks and implementing capital controls on July 7, 2015 out of fear that Greek citizens would initiate a run on domestic banks. The controls put limits on the daily cash withdrawals at banks and placed restrictions on monetary transfers and overseas credit card payments.

On July 22, 2016, Greece's Finance Minister reported that the country would ease its capital controls to increase confidence in Greek banks. The easing was expected to increase the amount of money held at Greek banks.

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