Back Matter

Back Matter

Age Bakker, and Bryan Chapple
Published Date:
September 2002
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    Appendix I Chronology of Key Changes in Capital Account Restrictions in Selected Advanced Countries
    SeptemberTShort-term overseas borrowing restricted
    DecemberTThose undertaking long-term overseas borrowing required to hold a non-interest-bearing deposit with the Reserve Bank of Australia
    MarchTRestrictions on inward investment in real estate imposed
    JulyLRequirement to hold a noninterest-bearing deposit with the Reserve Bank when borrowing overseas was suspended (and not reintroduced)
    JulyLMonetary limits on overseas investment in equity or real estate abolished
    DecemberLRestrictions on interest-bearing investments by nonresidents abolished
    1985LExchange rate floated
    JanuaryLMost remaining restrictions abolished
    OctoberLRestrictions on inward direct investment eased
    MayTIntroduction of restrictions on capital inflows, including reserve requirement on increase to nonresident deposits of 25 percent (increased to 75 percent in August 1971)
    JarmarLSuspension of reserve requirement on increases in nonresident deposits
    JanuaryLAbolition of most restrictions on inward direct and portfolio investment
    AugustLPrior approval no longer required for a range of inward investment transactions
    FebruaryLMost remaining restrictions abolished
    NovemberLAbolition of all foreign exchange controls
    MayTComplete separation of the official and the free exchange market
    MarchLAbolition of the dual exchange market
    JulyLLong-term offshore borrowing by companies permitted
    MarchLLiberalization of inward and outward portfolio and direct investment
    DecemberLNonresident purchase of quoted bonds permitted
    FebruaryTRestriction of purchases of Danish bonds by nonresidents
    TDenmark authorized by European Commission to invoke safeguard measures
    MayLEasing of restrictions on purchases of foreign securities and direct investment
    LAbrogation of safeguard measures
    JanuaryLAbolition of restrictions on purchase of foreign shares by residents
    JuneLFurther liberalization measures
    OctoberLAbolition of all remaining exchange control regulations
    European Economic Community (EEC)
    DecemberLLiquidation of the European Payments Union
    LEEC currencies become externally convertible in current payment transactions
    MayLAdoption by Council of First Directive on capital movements
    DecemberLAdoption by Council of Second Directive on capital movements
    JulyTFrance authorized by the European Commission to invoke safeguard measures (Decision 68/301/EEC)
    MarchTAdoption by Council of the directive on regulating international capital flows and neutralizing their undesirable effects on domestic liquidity (Directive 72/156/EEC)
    DecemberTIreland authorized by the Commission to invoke safeguard measures
    DecemberLCommission sets an expiration date for existing safeguard clauses for France (2 years) and Italy and Ireland (3 years), and limits safeguards to existing restrictions (Decisions 85/14, 15, and 16/EEC)
    NovemberTGreece authorized by the Commission to take certain safeguard measures for a period of three years (Decision 85/594/EEC)
    TAdoption by Council of directive (Directive 85/583/EEC) on undertakings for collective investments in transferable securities (UCITS)
    MayLCommission presents a program for liberalization of capital movements in European Community
    JuneLAbrogation of safeguard clause for France
    NovemberLAdoption by Council of Third Directive on capital movements (Directive 86/566/EEC)
    FebruaryLModification of existing safeguard clauses with respect to Greece, Ireland, and Italy to accommodate extension of liberalization obligations under the 1986 directive
    JulyLAbrogation of safeguard clause for Italy
    DecemberTSafeguard clause for Ireland is extended for one year (Decision 88/12/EEC)
    JuneLAdoption by Council of the Fourth Directive on capital movements (Directive 88/361/EEC)
    NovemberLAbrogation of safeguard clause for Ireland
    TAuthorization for Greece to take safeguard measures is extended until the end of 1989 (Decision 88/600/EEC)
    DecemberTFurther extension, for six months, of derogation enjoyed by Greece (Decision 89/644/EEC)
    DecemberLAuthorized banks able to enter forward exchange contracts to cover merchandise trade risks
    MayLForeigners able to acquire Finnish listed shares and bonds provided transactions were handled by an authorized bank
    OctoberTRaising of trade-related credits of more than 6 months became subject to permission
    JanuaryLAbolition of restrictions on raising of trade-related credits and liberalization of foreign travel and emigrant allowances
    JanuaryLEasing of obligations to surrender foreign exchange receipts
    JuneLAuthorized banks able to take part in syndicates for foreign bank loans, and to finance such loans with foreign credit
    DecemberLIncrease in authorized bank’s ability to lend abroad, invest in foreign securities, and channel long-term foreign credit to domestic borrowers
    JuneTSale of markka-denominated bonds to nonresidents prohibited
    JuneLBan on sale of markka-denominated bonds to nonresidents eased
    AugustLManufacturing and shipping companies able to raise foreign credits
    JuneLEasing in restrictions on direct investment abroad
    AugustLAbility to raise foreign credits extended beyond manufacturing and shipping companies
    AugustLDirect investment abroad by (non financial) companies exempted from authorization
    SeptemberLPortfolio investment abroad by (non financial) companies permitted without limit
    LDirect investment in Finland no longer requires authorization
    FebruaryLSale of markka-denominated bonds to nonresidents allowed
    LNonresidents allowed to issue markka-denominated bonds in Finland
    JulyLAll restrictions on foreign investment by individuals abolished
    JanuaryLMost remaining restrictions abolished (including restrictions on short-term capital movements)
    OctoberLIndividuals and comparable corporate entities allowed to raise loans abroad
    JuneLIn corporation of surcharge of 20 percent on official exchange rate in a new reference rate for U.S. dollar
    JuneLAbolition of 50 percent deposit on foreign exchange purchases by importers
    JanuaryLMonetary reform: introduction of the “new” franc, abolition of the Exchange Office
    FebruaryLEasing of foreign exchange allowances for travel purposes and other transactions in personal sphere
    AprilLAbolition of parallel devises-titres market for cross-border transactions by residents in foreign securities
    LFurther relaxation of exchange controls
    AprilTProhibition of payment of interest on French franc deposits held by nonresidents
    AugustTCurtailment of loans by nonresidents to residents
    OctoberLAbolition of restriction on commercial banks engaging in forward transactions
    JanuaryLIntroduction of positive system of exchange regulation
    JanuaryLSubstantial relaxation of exchange controls
    LAbolition of prohibition on paying interest on French franc deposits held by nonresidents
    MayTReintroduction of temporary exchange control and of restrictions on allowances for foreign travel by residents
    SeptemberLAbolition of exchange control measures introduced in May 1968
    NovemberTReintroduction of essentially the same exchange control measures as were applied in May 1968
    AugustTReintroduction of devises-titres market
    AugustLEasing of restrictions on outward direct investment and abolition of camel de change for foreign travel allowances
    AprilTImposition of minimum reserve requirement on external bank liabilities
    AugustTEstablishment of dual exchange market, comprising official market for import and export transactions and trade-related invisibles and financial franc market for all other transactions
    OctoberTMerger of devises-titres market into dual exchange market
    MarchTProhibition of paying interest on bank deposits of nonresidents
    TRaising of minimum reserve requirement on growth of external bank liabilities to 100 percent
    OctoberLAbolition of prohibition of payment of interest on bank deposits of nonresidents
    LAbolition of minimum reserve requirement on growth of external bank liabilities
    JanuaryTProhibition of French franc borrowing by nonresidents, restriction of forward transactions by residents, and relaxation of borrowing abroad by residents
    MarchTAbolition of the dual exchange market
    TSevere tightening of controls on capital outflows and relaxation of controls on capital inflows
    JulyLRestrictions on inward and outward direct investment relaxed
    MayTReintroduction to devises-titres market, limitations on leads and lags in trade settlements, and limitations on direct investment abroad
    MarchTFurther restrictions on surrender of export proceeds and on direct investment abroad
    MarchTFurther reduction of foreign travel allowances, a ban on use of personal credit cards abroad, and introduction of carnet de change, a booklet in which foreign exchange purchases were recorded
    DecemberLSome easing of limits on foreign travel allowances and foreign direct investment
    LAbolition of carnet de change
    JulyLAbolition of ban on use of personal credit cards abroad
    NovemberLEasing of controls on direct investment abroad
    FebruaryLEasing of inward direct investment originating from non-EEC countries
    AprilLAuthorization of Eurobond issues denominated in French francs
    SeptemberLEasing of financing rules for outward direct investment outside the European Community
    DecemberLEasing of regulations for outward portfolio and direct investment
    JanuaryLEasing of foreign travel allowances
    AprilLElimination of requirement of prior authorization of direct foreign investment
    MayLAbolition of devises-titres market, liberalization of purchases of secondary residences abroad, easing of forward foreign exchange operations, and easing of authorization procedures for direct investment abroad
    NovemberLPartial liberalization of bank lending in French francs to nonresidents
    LAbolition of administrative control through commercial banks of import and export settlements (domiciliation regime)
    MayLSubstantial easing of exchange controls for commercial enterprises
    LLiberalization of trade in gold
    JulyLAbolition of limits on tourist travel allowances
    JuneLPermission for domestic enterprises to operate foreign currency accounts
    LAbolition of restrictions on borrowing abroad
    MarchLFull liberalization of bank lending in French francs to nonresidents
    JuneLLiberalization of commercial banks’ foreign exchange positions
    LPermission granted for all residents to open ECU-denominated accounts
    JanuaryLAbolition to all remaining exchange control regulations (Decree 89/938)
    Germany, Federal Republic of
    JanuaryLPermission for residents to maintain foreign currency accounts abroad
    JulyLLiberalization of inward investment by nonresidents
    AugustLLiberalization of transactions in German bonds denominated in foreign currency
    MayLAbolition of all remaining restrictions on import of capital
    AugustLEasing of regulations concerning investment abroad by residents
    JuneTProhibition to pay interest on deutsche mark deposits held by nonresidents and to sell money market paper to nonresidents
    SeptemberLIntroduction of new Foreign Trade and Payments Law, establishing a positive system of exchange regulation
    JanuaryLMerger of free market for capital transactions with official exchange market
    MarchLAbolition of restrictions on investments in foreign securities by residents
    MarchTIntroduction of withholding tax (coupon tax) on interest income on assets held by nonresidents
    JanuaryLExtension of permission for outward direct investment to the OECD area (previously allowed only in EEC countries)
    NovemberLEasing of limitations on export of banknotes and on settlement requirements
    DecemberTImposition of minimum reserve requirement on growth of external bank liabilities
    OctoberLAbolition of minimum reserve requirement on growth of external bank liabilities
    AprilTReintroduction of minimum reserve requirement on growth of external bank liabilities
    MayTProhibition of payment of interest on bank deposits of nonresidents and of purchases by nonresidents of money market paper
    MarchTImposition of a cash reserve (Barde-pot) requirement for liabilities incurred vis-à-vis nonresidents
    JulyTProhibition of sales of fixed-interest securities to nonresidents
    TTightening of minimum reserve and Bardepot requirements
    FebruaryTProhibition of sales of all credit instruments to, and of borrowing from, nonresidents
    JuneTFurther tightening of minimum reserve and Bardepot requirements
    JanuaryLAbolition of minimum reserve requirement on growth of external bank liabilities
    FebruaryLReduction of Bardepot requirement and abolition of authorization requirements for sale to nonresidents of credit instruments other than domestic fixed-interest securities with maturity of less than 4 years
    SeptemberLAbolition of Bardepot requirement
    SeptemberLAbolition of prohibition on paying interest on deutsche mark deposits held by nonresidents
    LAbolition of authorization requirements for sales to nonresidents of securities with maturity of 2 to 4 years
    DecemberTReintraduction of authorization requirements for sales to nonresidents of securities with a maturity less than 4 years
    JanuaryTReintroduction of minimum reserve requirement on growth of external bank liabilities
    JuneLAbolition of minimum reserve requirement on growth of external bank liabilities
    MarchLRelaxation of restrictions on sale of short-term paper to nonresidents
    MarchLAll restrictions on sale of short-term deutsche mark paper to nonresidents abolished
    AugustLAbolition of coupon tax on interest income on assets held by nonresidents
    JuneTReimposition of reserve requirement (of 50 percent) on capital inflows with commercial banks
    DecemberTIn consequence of Ireland’s decision to participate in the EMS, exchange controls extended to the United Kingdom
    TAbolition of investment currency market
    SeptemberLEasing of restrictions on acquiring of foreign securities
    JanuaryLEasing of restrictions on long-term outflows
    JanuaryLLiberalization of purchases of medium- and long-term foreign securities by residents
    AprilLFurther relaxation and easing of administrative requirements
    JanuaryLEasing of restrictions on purchases of foreign securities, borrowing in foreign currency, and extending loans to nonresidents
    JanuaryLAbolition of all remaining exchange control regulations
    JuneTIntroduction of measures aimed at restricting capital outflows, ban on net external credit position of banks, and suspension of external convertibility of Italian banknotes
    JanuaryTEstablishment of dual exchange market
    JulyTIntroduction of 50 percent compulsory non-interest-bearing deposit scheme with respect to most capital outflows
    MarchLAbolition of dual exchange market
    MayTIntroduction of temporary compulsory non-interest-bearing deposit scheme with respect to imports, excluding raw materials, oil, and investment goods
    TItaly authorized by the Commission to invoke safeguard measures (Decision 74/287/EEC)
    MarchTReintroduction of compulsory bank financing in foreign exchange for advance settlement of imports
    MayTReintroduction of the non-interest-bearing import-deposit scheme
    OctoberTImposition of temporary special tax on purchases of foreign currency and payments abroad
    TExtension of compulsory import-deposit scheme
    FebruaryLExpiration of special tax on foreign currency purchases
    AprilLAbolition of compulsory import-deposit scheme
    MayTReintroduction of non-interest-bearing deposit scheme with respect to purchases of foreign currency by residents
    FebruaryLAbolition of the advance deposit scheme
    DecemberLCertain direct investment abroad is exempted from the 50 percent non-interest-bearing deposit requirements
    DecemberLReduction of compulsory zero-deposit requirements on portfolio investment abroad
    OctoberLAbolition of compulsory deposit requirement for direct investment abroad
    LResidents’ foreign exchange deposits made freely convertible into other currencies and ban on transfer of foreign securities and loans between residents lifted
    LReduction of compulsory deposit requirements on other transactions
    AugustLRestoration of external convertibility of Italian banknotes
    MarchTIntroduction of reserve requirement on bank deposits in foreign currency
    MayLAbolition of non-interest-bearing deposit requirement for investment abroad in securities and real estate
    SeptemberTShortening of holding periods of foreign currencies
    JuneLRestrictions on tourist spending eased
    OctoberLIntroduction of a positive system of exchange control
    LSignificant relaxation of controls
    JanuaryLAbolition of restrictions on purchases of foreign securities by residents
    MayAbolition of all remaining exchange control regulations
    JuneLControls on foreign direct investment eased
    JulyLIntroduction of nonresident free yen accounts
    JulyLFurther easing in foreign direct investment regulations
    JulyLRestrictions on outward direct and portfolio investment eased
    SeptemberTRestrictions on yen conversion of advance export receipts
    JuneTMarginal reserve requirement imposed on nonresident free yen accounts
    OctoberTRestrictions on the purchase of Japanese securities by nonresidents
    NovemberLRestrictions on portfolio outflows eased further
    NovemberLEasing of restrictions on advance receipt of export payments
    NovemberTAcquisition of foreign short-term (maturity of less than six months) securities by residents restricted
    DecemberLEasing of restrictions on purchase of Japanese securities and lowering of marginal reserve requirement on nonresident free yen accounts
    JanuaryTTightening of portfolio outflow restrictions, including voluntary restraints on institutional investors
    AprilTJapanese banks instructed not to finance “non-urgent” foreign direct investment
    SeptemberLMarginal reserve requirement on nonresident free yen accounts abolished
    MarchLAbolition of “voluntary restraints” on banks’ purchase of foreign securities
    JuneLRestrictions on foreign currency accounts of residents eased
    JuneTReserve requirements introduced on foreign currency liabilities of foreign exchange banks, residents’ external foreign currency deposits, and nonresident free yen accounts.
    MarchTMarginal reserve requirement on nonresident free yen accounts increased, further restrictions placed on portfolio inflows
    FebruaryLMarginal reserve requirement on nonresident free yen accounts abolished
    FebruaryLRestrictions on nonresident purchase of bonds eased
    MayLEasing of restrictions on portfolio flows
    MarchLEasing of restrictions on portfolio inflows
    DecemberLRevision of Foreign Exchange and Foreign Trade Control Law
    JuneLLiberalization of short-term Euroyen lending by Japanese banks
    AprilLAbolition of requirement to link forward exchange transactions to trade
    MayLPublication of Report on Yen/Dollar Exchange Issues
    JuneLFurther easing of portfolio flows
    MayLAbolition of prior notification requirement for residents undertaking short-term borrowing in Euroyen
    AugustLEasing of limits on offshore investment by institutional investors
    DecemberLJapanese Offshore Market (JOM) opened
    AprilLEasing of restrictions on flows of funds between JOM and domestic markets
    AprilLRestrictions on inward foreign direct investment eased
    AprilLIntroduction of Foreign Exchange and Foreign Trade Control Law
    JulyLIssuance of general licenses for a number of types of outward capital movements
    OctoberLFurther relaxation of exchange controls
    DecemberLOpening up of Netherlands capital market for issuance of foreign guilder loans up to a ceiling
    OctoberLAbolition of “free market” for cross-border transactions in securities
    SeptemberTIntroduction of free market for bond transactions (“0-circuit”)
    MarchTProhibition of payment of interest on guilder deposits held by non-residents
    JulyTFurther tightening of exchange controls, affecting leads and lags and the taking up of foreign credit by residents
    FebruaryLAbolition of closed bond circuit
    JanuaryLAbolition of prohibition on paying interest on guilder deposits held by nonresidents
    SeptemberLSwitch over to a positive system of exchange control
    LFurther easing of regulations concerning capital outflows
    MayLComing into force of the External Financial Relations Act, which supersedes the Exchange Control Decree of 1945
    JulyLAbolition of all remaining restrictions on capital inflows
    OctoberLAbolition of all remaining restrictions on capital outflows
    LFull liberalization of all capital transactions.
    New Zealand
    JanuaryTBorrowing in New Zealand by foreign companies resident in New Zealand and offshore borrowing by New Zealand companies require approval in all cases
    JuneTRestrictions on overseas borrowing by New Zealand companies tightened
    AugustLFinancial institutions allowed to borrow offshore for industrial development
    JanuaryTRestrictions on dealing in foreign exchange tightened
    NovemberLAll restrictions on access of foreign-owned companies operating in New Zealand to domestic capital markets abolished
    LFinancial institutions permitted to borrow abroad
    DecemberLAll controls on both inward and outward foreign exchange transactions abolished
    LRules limiting offshore borrowing eased
    MarchLThe New Zealand dollar floated
    OctoberLPermission no longer required for offshore borrowing
    LRules limiting foreign companies borrowing or issuing share capital in New Zealand abolished
    AugustLInward direct investment rules eased
    MarchLRelaxation of foreign travel allowances
    SeptemberLRelaxation of controls on purchases of foreign securities by residents
    DecemberLAbolition of prior authorization requirement of inward direct investment
    MarchLEasing of restrictions on acquisition of foreign securities
    JuneLLiberalization of direct and portfolio investment abroad
    SeptemberLAbolition of compulsory deposit requirement against foreign currency
    DecemberLAbolition of all remaining exchange control regulations
    JuneLLiberalization of inward direct investment and right of establishment
    NovemberLRelaxation of controls on outward direct investment
    OctoberLRelaxation of controls on foreign currency operations by commercial banks
    DecemberLLiberalization of outward direct investment and trade in medium-and long-term foreign securities
    JanuaryTImposition of nonremunerated reserve requirement on financial credits taken up abroad
    SeptemberLPermission granted for residents to open accounts denominated in ECUs
    AprilLFurther relaxation measures
    AprilLAbolition of restrictions on opening of foreign currency accounts
    FebruaryLAbolition of all remaining exchange control regulations
    SeptemberTReintroduction of certain restrictions, mainly with respect to short-term financial credits
    NovemberLAbolition of all remaining exchange control regulations
    JanuaryLForeign-currency borrowing via banks permitted for trade financing
    JuneLLiberalization of controls on forward exchange dealing
    1981LConditions for financing direct investment abroad from within Sweden made less restrictive
    AprilLTrading of foreign shares permitted on Swedish stock market
    FebruaryLEasing of restrictions on offshore borrowing by enterprises and local authorities
    MarchLRestrictions on forward dealing further liberalized
    JuneLAbolition of requirement to finance outward direct investment using foreign currency loans
    JanuaryLFurther easing of restrictions on foreign exchange and forward transactions
    NovemberLEasing of restrictions on the purchase of foreign shares
    DecemberLEasing of restrictions on inward and outward direct investment
    JuneLAbolition of almost all remaining exchange controls
    DecemberLBranches of foreign banks permitted to participate in Riksbank’s clearing system on the same terms as Swedish banks
    JulyTImposition of 100 percent reserve requirement on marginal increases in nonresident deposit, and ban on interest payments on new nonresident deposits
    JulyTRestrictions on residents’ offshore borrowing imposed, nonresident purchase of securities and real estate prohibited, and “negative” interest rate introduced on marginal nonresident deposits
    OctoberLSuspension of negative interest rate on nonresident deposits
    NovemberTReintroduction of negative interest rate
    FebruaryTRestrictions placed on imports of foreign banknotes and purchase of domestic securities by foreigners
    AprilTScope of deposits to which negative interest rate applied widened
    JanuaryLAbolition of restrictions on imports of foreign bank notes and on purchase of domestic securities by foreigners
    MayLLicensing of residents’ offshore borrowing abolished
    DecemberLSuspension of negative interest rate on nonresident deposits
    FebruaryLBan on payment of interest on nonresident savings accounts lifted
    AugustLAbolition of remaining restrictions on payment of interest on nonresident deposits
    JanuaryLEasing of issue requirements for foreign bonds
    JanuaryLLimits on foreign bond issues raised
    MayLLimits on foreign bond issues abolished
    United Kingdom
    DecemberLSterling becomes convertible
    JulyTRestrictions on direct investment outside sterling area introduced
    AprilLEasing of restrictions on repatriation of nonresidents’ capital
    AugustTIntroduction of controls on portfolio inflows
    DecemberLAbolition of controls on portfolio inflows
    JulyTEasing of capital controls vis-à-vis EEC members postponed
    NovemberTRestrictions on banks’ financing trade between countries other than the United Kingdom imposed, conversion of foreign currency bills into sterling by banks no longer permitted
    DecemberTMonitoring of sales of foreign currency for sterling tightened
    OctoberLEasing of restrictions on sterling borrowing to fund inward direct investment and also on travel allowances for residents
    DecemberLEasing of capital outflows to other EEC countries
    JuneLEasing of restrictions on resident institutional investors investing in foreign currency securities
    JanuaryLRestrictions on sterling lending to nonresident-controlled companies operating in the United Kingdom largely abolished
    JuneLEasing of restrictions on outward capital flows
    JulyLAll restrictions on outward direct investment abolished and outward portfolio investment significantly liberalized
    OctoberLThe Exchange Control Act of 1947 suspended and all remaining barriers to inward and outward flows of capital removed
    LAbolition of remaining exchange controls
    United States
    JulyTAnnouncement of introduction of Interest Equalization Tax (enacted 1964)
    MarchTIntroduction of voluntary guidelines limiting foreign lending and investment
    JanuaryTGuidelines limiting foreign direct investment made mandatory
    JanuaryLAbolition of capital controls, including voluntary guidelines

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    As noted in Section I, monetary policy or other motives may also have played sonic pan in motivating capital controls—even where the exchange rate appeared to be the most important factor.

    Nonresident free yen accounts were introduced in July 1960. Nonresidents could deposit yen balances (received from current account transactions or the sale of foreign exchange) into these accounts. Although yen balances; in these accounts could be freely converted back to foreign currencies, other yen balances could not be converted into foreign exchange.

    See for example Fukao (1990) and Argy (1987) and the references therein.

    In 1971, the floating of the deutsche mark and the suspension of the convertibility of the U.S. dollar into gold led to an expectation of a yen revaluation. Large capital inflows occurred, and Japan’s official reserves increased from US$4.4 billion to US$7.9 billion in the first seven months of 1971, In August alone, just before the floating of the yen, capital inflows of US$4 billion were recorded through channels such as advance payments for exports.

    In the devises-titres market, proceeds from sales of foreign securities by residents were sold in an unregulated exchange market to other residents to enable them to acquire foreign securities.

    Restrictions included the establishment of a 100 percent marginal reserve requirement on incremental French franc deposits of nonresidents. At the same time, controls on capital outflows were maintained, partly because there was a simultaneous tendency for the French franc to depreciate against the deutsche mark.

    In April 1972, after the demise of the Bretton Woods system, the snake was established as a multilateral European exchange arrangement—with bilateral fixed, but adjustable fluctuation margins—aimed at stabilizing intra-European exchange rates.

    The tightening of controls on capital outflows (in March 1974) was combined with the abolition of the dual exchange market, which, on the whole, had been considered rather ineffective.

    In 1984, expiration dates were set for the remaining recourse to safeguard clauses for France (two years), which had been invoked since the 1968 civil unrest, and for Italy and Ireland (three years).

    The Single Act fell short of enacting the complete liberalization of capital movements. However, it stipulated that further obligations concerning the freedom for capital movements could be taken by qualified majority and that unanimity would be required for measures that would constitute a step backward. This greatly facilitated the adoption of secondary legislation with respect to the liberalization of capital movements.

    The Maastricht Treaty establishing the EMU was not approved in a referendum in June 1992 in Denmark.

    Spain introduced non-interest-bearing cash reserves for incremental peseta lending to nonresidents. Portugal intensified the enforcement of existing regulations.

    See, for instance, Eichengreen and Wyplosz (1993). (The Tobin tax, proposed by economist James Tobin of Yale University, would be a tax on transactions in foreign exchange markets.)

    Following balance of payments problems in Canada in early 1968, all Canadian transactions were exempted from restrictions under U.S. balance of payments programs. In contrast, the Japanese balance of payments position improved and the exemption for long-term investment in Japan was ended in 1969.

    The Board of Governors of the Federal Reserve System was given the authority to impose regulations (and make the program mandatory) in 1968. However, the Board chose to continue with the voluntary nature of the scheme, given the widespread cooperation from financial institutions.

    An additional ceiling to finance U.S. exports was introduced at the end of 1969 to ensure that the program did not hinder exports. A more significant easing in the program took place in November 1971 when all foreign credit to finance imports was exempted from the program.

    Although the growth of the Eurodollar market was partly at the expense of U.S.based financial markets, U.S. banks were very active in this market and reported significant earnings from their international activities.

    A minimum reserve requirement on the growth of external liabilities, which had applied from December 1968 until October 1969, had been reintroduced in April 1970.

    A key objective of industrial policy was to prevent the takeover of innovative Japanese companies by foreign competitors. See Ito (1992) and Argy and Stein (1997) for a more detailed discussion of Japanese industrial policy.

    The Gensaki market was a market for repurchase agreements in which nonfinancial institutions were able to participate. Nonresidents sere allowed to access the market from 1979 onward.

    The real demand principle was eventually abolished in April 1984.

    Frankel (1984) provides a summary of the events leading up to the establishment of the working group, including a discussion of a possible misalignment in bilateral exchange rates. He argues that although the stated purpose of the agreement was to bring about a yen appreciation, the changes agreed to were, in practice, more likely to put (temporary) downward pressure on the value of the yen.

    Segmentation rules for offshore activities were also less strict than those applied domestically.

    This position was reversed in the early 1990s, when Japanese banks reduced their Euromarket operations.

    Bond issues by Japanese corporations (both foreign and domestic) rose from ¥1.7 trillion in the year ending March 1980 to ¥6.8 trillion in the year ending March 1985, and to ¥21.8 trillion in the year ending March 1989. Offshore issues rose from around 40 percent of total issues in 1980 to around 60 percent in 1989.

    Issuing costs were also generally lower offshore (see Takeda and Turner, 1992).

    Fukao (1990) notes that institutions did not invest offshore to the maximum extent permitted, suggesting that the new limits sere not binding.

    Ito (1992) illustrates this on the basis of covered interest parity calculations. In contrast, prior to 1980, capital controls appear to have been at least partially effective in insulating Japanese financial markets. Fukao (1990) argues that controls tended to be effective when initially introduced, but that their effectiveness gradually eroded.

    An indication of the extent of the overseas expansion of financial institutions is provided by foreign direct investment data. Osugi (1990) documents that foreign direct investment by banking and insurance companies exceeded that by manufacturing companies between 1985 and 1987.

    The debt level of nonfinancial corporations increased from 101 percent of GDP in 1985 to 135 percent in 1990. For the household sector, debt as a share of disposable income rose from 68 percent to 96 percent in the same period.

    The ratio of financial assets to liabilities for the manufacturing sector rose from about 0.6 at the beginning of the 1980s to more than 1 in 1988.

    Banks had traditionally operated with interest rate spreads that were largely fixed, and therefore profitability was determined mainly by market share. Deregulation placed downward pressure on interest rate margins while also leading to greater competition between lenders for market share Kanaya and Woo (2000) note that banks reduced credit standards during the asset price boom in their attempts to continue lending.

    Government involvement in the economy was extensive. This nationalization process added companies accounting for around 15 percent of industrial activity and raised government control of the banking sector to 85-90 percent (Barker, Britton, and Major, 1984).

    In contrast, the policy objective of the French authorities of ensuring that strategic firms benefit from adequate financial conditions had attracted additional foreign capital inflows.

    Grilli and Roubini argue, in an article included in Conti and Hamaui (1993), that the removal of capital controls in Europe may have reduced asymmetric intra-EMS exchange rate responses to movements in the U.S. dollar rate by increasing asset substitutability.

    These exemptions included foreign direct investment. When, in the mid-1970s, serious balance of payments problems arose, further delays were granted. France had been granted a derogation from the liberalization directive since 1968 under the safeguard clause.

    Alternatively, exemptions for foreign direct investment were granted if the proposal could be expected to be beneficial for the balance of payments. In order to secure such benefit, a substantial part of the profits earned abroad had to be repatriated. In order to enforce compliance, a large administrative apparatus was needed to separate cross-border current account transactions from investment transactions.

    In mid-1979, official foreign reserves were US$22 billion (equivalent to almost six months of imports) and exceeded the outstanding stock of short-term and medium-term official debt, which was US$15.5 billion.

    Apart from ceilings on foreign travel allowances and similar restrictions, the main capital controls remaining in mid-1979 were the obligation to finance foreign direct investment abroad in excess of £5 million in foreign currency, the prohibition of sterling bank financing of trade between third countries, and the obligation to execute cross-border portfolio transactions through the investment currency market. In 1979, a window of opportunity arose to abolish the investment currency market, because the effective premium for U.S. dollar purchases had fallen from 50 percent at the beginning of the year to 6 percent by midyear. At such relatively low premium levels, the windfall capita losses in pounds sterling for portfolio holdings were quite limited.

    See Artis and Taylor (1989), p. 172, who summarize earlier studies on this issue.

    See, for example, Evans and others (1996) and the various contributions in Silverstone and others (1996).

    Carey and Duggan (1986) briefly document the history and abolition of exchange controls.

    At the same time, the exchange rate was fixed against a basket of currencies, replacing an earlier “crawling-peg” system that resulted in frequent small devaluations based on inflation differentials between New Zealand and its major trading partners.

    Official borrowings in the month prior to the election (mainly to support the exchange rate) totaled US$1.2 billion (3.5 percent of GDP). See the discussion in Reserve Bank of New Zealand (1985).

    Limits on the spot currency holdings of foreign exchange dealers were relaxed and then abolished at the end of the year (aside from prudential requirements). Rules limiting private offshore borrowing were abolished in October 1984. From November 1984. New Zealand financial institutions were permitted to borrow funds offshore, while foreign-owned companies operating in New Zealand were able to raise funds on domestic capital markets.

    There has been no intervention in foreign exchange markets since the New Zealand dollar was floated.

    Direct investment inflows rose from US$175 million in 1983 to US$1.3 billion in 1985, During the same period, the increase in direct investment outflows was less dramatic, rising from US$75 million to US$309 million. The privatization of government businesses is likely to have influenced inflows from the late 1980s. The New Zealand dollar appreciated by almost 50 percent against the U.S. dollar between the beginning of 1985 and the second quarter of 1988. more than offsetting the 20 percent depreciation of mid-1984.

    The introduction of, and subsequent increase in, a goods and services tax also influenced the inflation rate in 1986 and 1989. respectively.

    Private sector debt increased from 11.4 percent of GDP in March 1984 to about 14 percent by March 1987.

    In Norway and Finland, these crises were also linked to falling oil prices and to the collapse of trade with the former Soviet Union. See Drees and Pazarbaşioģlu (1998) for further discussion.

    Strengthening prudential supervision was seen by some at the time as running counter to the ideology underpinning deregulation and liberalization (see Thomson, 1991). Market participants may also be overconfident of their ability to respond to the new environment. For example, in arguing for financial sector reform. Jonung (1986) claims that “a bank collapse was out of the question” (p.116) in Sweden and considers that there was a tendency to underestimate the market’s ability to self-regulate. In fact, a lightening in prudential standards was required following financial sector reform.

    The fact that liberalization often followed changes of government (with associated changes in economic philosophy) in both the United Kingdom and New Zealand suggests that political factors also influence the decision on whether or not to liberalize.

    See Demirgüç-Kunt and Detragiache (1998) for an investigation of the links between financial sector reform and financial crisis. They conclude that the institutional environment has an important influence on the risk of a crisis.

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