CAPITAL CONTROL

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. This includes taxes, tariffs, outright legislation and volume restrictions, as well as market-based forces. Capital controls can affect many asset classes such as equities, bonds and foreign exchange trades.

Tight capital controls are most often found in developing economies, where the capital reserves are lower and more susceptible to volatility.

Capital controls are the subject of much debate; some feel that they inherently limit economic progress and efficiency while others see them as prudent, adding a measure of safety to the economy. Most of the largest economies have a liberal policy of capital control, having phased out stricter rules from the past. But most of these same economies have basic stopgap measures in place to prevent against a mass exodus of capital (outflows) during a time of crisis or a massive speculative assault on the currency.

Global factors, like globalization and the integration of financial markets, have contributed to an overall easing of capital controls. Opening up an economy to foreign capital generally allows for companies to have easier access to capital, and can raise overall demand for domestic stocks.