Capital Controls
Capital controls are government-imposed restrictions on cross-border capital flows to stabilize the financial system or currency.
Meaning in Practice
Authorities may limit foreign exchange transactions, restrict capital outflows, or impose taxes on short-term inflows. These measures are typically introduced during periods of financial instability or currency pressure.
Why It Matters
Capital controls aim to reduce volatility, prevent capital flight, and protect foreign exchange reserves. However, they can distort markets and reduce investor confidence.
Market Impact
The introduction of capital controls often leads to currency stabilization in the short term but may discourage foreign investment. Equity and bond markets can react negatively due to reduced liquidity and access.
Example
During a currency crisis, a government temporarily restricts large cross-border fund transfers to prevent rapid capital outflows.