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Abstract
At a conceptual level, it is generally acknowledged that a free and open system for capital movements would contribute to the efficient allocation of world saving and enhance the welfare of participating countries. However, a strand of theoretical models also suggests that as a “second-best” solution, restrictions on capital movements may improve welfare in the presence of preexisting distortions. Accordingly, the preconditions for realizing the benefits of liberalization may not be present, and some countries may continue to restrict capital movements.3 Empirical literature, by contrast, while not conclusive, generally points to the ineffectiveness of controls in sustaining inconsistent macroeconomic policies.4
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