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Back Matter

Author(s):
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
Australia
1972
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
1973
MarchTRestrictions on inward investment in real estate imposed
1977
JulyLRequirement to hold a noninterest-bearing deposit with the Reserve Bank when borrowing overseas was suspended (and not reintroduced)
1981
JulyLMonetary limits on overseas investment in equity or real estate abolished
1983
DecemberLRestrictions on interest-bearing investments by nonresidents abolished
1985LExchange rate floated
JanuaryLMost remaining restrictions abolished
OctoberLRestrictions on inward direct investment eased
Austria
1971
MayTIntroduction of restrictions on capital inflows, including reserve requirement on increase to nonresident deposits of 25 percent (increased to 75 percent in August 1971)
1975
JarmarLSuspension of reserve requirement on increases in nonresident deposits
1976
JanuaryLAbolition of most restrictions on inward direct and portfolio investment
1981
AugustLPrior approval no longer required for a range of inward investment transactions
1989
FebruaryLMost remaining restrictions abolished
1991
NovemberLAbolition of all foreign exchange controls
Belgium-Luxembourg
1971
MayTComplete separation of the official and the free exchange market
1990
MarchLAbolition of the dual exchange market
Denmark
1968
JulyLLong-term offshore borrowing by companies permitted
1973
MarchLLiberalization of inward and outward portfolio and direct investment
1974
DecemberLNonresident purchase of quoted bonds permitted
1979
FebruaryTRestriction of purchases of Danish bonds by nonresidents
TDenmark authorized by European Commission to invoke safeguard measures
1983
MayLEasing of restrictions on purchases of foreign securities and direct investment
LAbrogation of safeguard measures
1984
JanuaryLAbolition of restrictions on purchase of foreign shares by residents
1985
JuneLFurther liberalization measures
1988
OctoberLAbolition of all remaining exchange control regulations
European Economic Community (EEC)
1958
DecemberLLiquidation of the European Payments Union
LEEC currencies become externally convertible in current payment transactions
1960
MayLAdoption by Council of First Directive on capital movements
1962
DecemberLAdoption by Council of Second Directive on capital movements
1968
JulyTFrance authorized by the European Commission to invoke safeguard measures (Decision 68/301/EEC)
1972
MarchTAdoption by Council of the directive on regulating international capital flows and neutralizing their undesirable effects on domestic liquidity (Directive 72/156/EEC)
1980
DecemberTIreland authorized by the Commission to invoke safeguard measures
1984
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)
1985
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)
1986
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)
1987
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)
1988
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)
1989
DecemberTFurther extension, for six months, of derogation enjoyed by Greece (Decision 89/644/EEC)
Finland
1958
DecemberLAuthorized banks able to enter forward exchange contracts to cover merchandise trade risks
1959
MayLForeigners able to acquire Finnish listed shares and bonds provided transactions were handled by an authorized bank
1961
OctoberTRaising of trade-related credits of more than 6 months became subject to permission
1968
JanuaryLAbolition of restrictions on raising of trade-related credits and liberalization of foreign travel and emigrant allowances
1973
JanuaryLEasing of obligations to surrender foreign exchange receipts
1982
JuneLAuthorized banks able to take part in syndicates for foreign bank loans, and to finance such loans with foreign credit
1984
DecemberLIncrease in authorized bank’s ability to lend abroad, invest in foreign securities, and channel long-term foreign credit to domestic borrowers
1985
JuneTSale of markka-denominated bonds to nonresidents prohibited
1986
JuneLBan on sale of markka-denominated bonds to nonresidents eased
AugustLManufacturing and shipping companies able to raise foreign credits
1987
JuneLEasing in restrictions on direct investment abroad
AugustLAbility to raise foreign credits extended beyond manufacturing and shipping companies
1988
AugustLDirect investment abroad by (non financial) companies exempted from authorization
1989
SeptemberLPortfolio investment abroad by (non financial) companies permitted without limit
LDirect investment in Finland no longer requires authorization
1990
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
1991
JanuaryLMost remaining restrictions abolished (including restrictions on short-term capital movements)
OctoberLIndividuals and comparable corporate entities allowed to raise loans abroad
France
1958
JuneLIn corporation of surcharge of 20 percent on official exchange rate in a new reference rate for U.S. dollar
1959
JuneLAbolition of 50 percent deposit on foreign exchange purchases by importers
1960
JanuaryLMonetary reform: introduction of the “new” franc, abolition of the Exchange Office
1962
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
1963
AprilTProhibition of payment of interest on French franc deposits held by nonresidents
AugustTCurtailment of loans by nonresidents to residents
1965
OctoberLAbolition of restriction on commercial banks engaging in forward transactions
1967
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
1968
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
1969
AugustTReintroduction of devises-titres market
1970
AugustLEasing of restrictions on outward direct investment and abolition of camel de change for foreign travel allowances
1971
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
1973
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
1974
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
1980
JulyLRestrictions on inward and outward direct investment relaxed
1981
MayTReintroduction to devises-titres market, limitations on leads and lags in trade settlements, and limitations on direct investment abroad
1982
MarchTFurther restrictions on surrender of export proceeds and on direct investment abroad
1983
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
1984
JulyLAbolition of ban on use of personal credit cards abroad
NovemberLEasing of controls on direct investment abroad
1985
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
1986
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)
1987
MayLSubstantial easing of exchange controls for commercial enterprises
LLiberalization of trade in gold
JulyLAbolition of limits on tourist travel allowances
1988
JuneLPermission for domestic enterprises to operate foreign currency accounts
LAbolition of restrictions on borrowing abroad
1989
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
1990
JanuaryLAbolition to all remaining exchange control regulations (Decree 89/938)
Germany, Federal Republic of
1958
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
1959
MayLAbolition of all remaining restrictions on import of capital
AugustLEasing of regulations concerning investment abroad by residents
1960
JuneTProhibition to pay interest on deutsche mark deposits held by nonresidents and to sell money market paper to nonresidents
1961
SeptemberLIntroduction of new Foreign Trade and Payments Law, establishing a positive system of exchange regulation
1962
JanuaryLMerger of free market for capital transactions with official exchange market
1963
MarchLAbolition of restrictions on investments in foreign securities by residents
1965
MarchTIntroduction of withholding tax (coupon tax) on interest income on assets held by nonresidents
1966
JanuaryLExtension of permission for outward direct investment to the OECD area (previously allowed only in EEC countries)
1967
NovemberLEasing of limitations on export of banknotes and on settlement requirements
1968
DecemberTImposition of minimum reserve requirement on growth of external bank liabilities
1969
OctoberLAbolition of minimum reserve requirement on growth of external bank liabilities
1970
AprilTReintroduction of minimum reserve requirement on growth of external bank liabilities
1971
MayTProhibition of payment of interest on bank deposits of nonresidents and of purchases by nonresidents of money market paper
1972
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
1973
FebruaryTProhibition of sales of all credit instruments to, and of borrowing from, nonresidents
JuneTFurther tightening of minimum reserve and Bardepot requirements
1974
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
1975
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
1977
DecemberTReintraduction of authorization requirements for sales to nonresidents of securities with a maturity less than 4 years
1978
JanuaryTReintroduction of minimum reserve requirement on growth of external bank liabilities
JuneLAbolition of minimum reserve requirement on growth of external bank liabilities
1980
MarchLRelaxation of restrictions on sale of short-term paper to nonresidents
1981
MarchLAll restrictions on sale of short-term deutsche mark paper to nonresidents abolished
1984
AugustLAbolition of coupon tax on interest income on assets held by nonresidents
Ireland
1977
JuneTReimposition of reserve requirement (of 50 percent) on capital inflows with commercial banks
1978
DecemberTIn consequence of Ireland’s decision to participate in the EMS, exchange controls extended to the United Kingdom
TAbolition of investment currency market
1979
SeptemberLEasing of restrictions on acquiring of foreign securities
1988
JanuaryLEasing of restrictions on long-term outflows
1989
JanuaryLLiberalization of purchases of medium- and long-term foreign securities by residents
1990
AprilLFurther relaxation and easing of administrative requirements
1992
JanuaryLEasing of restrictions on purchases of foreign securities, borrowing in foreign currency, and extending loans to nonresidents
1993
JanuaryLAbolition of all remaining exchange control regulations
Italy
1972
JuneTIntroduction of measures aimed at restricting capital outflows, ban on net external credit position of banks, and suspension of external convertibility of Italian banknotes
1973
JanuaryTEstablishment of dual exchange market
JulyTIntroduction of 50 percent compulsory non-interest-bearing deposit scheme with respect to most capital outflows
1974
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)
1976
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
1977
FebruaryLExpiration of special tax on foreign currency purchases
AprilLAbolition of compulsory import-deposit scheme
1981
MayTReintroduction of non-interest-bearing deposit scheme with respect to purchases of foreign currency by residents
1982
FebruaryLAbolition of the advance deposit scheme
1983
DecemberLCertain direct investment abroad is exempted from the 50 percent non-interest-bearing deposit requirements
1984
DecemberLReduction of compulsory zero-deposit requirements on portfolio investment abroad
1985
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
1986
AugustLRestoration of external convertibility of Italian banknotes
1987
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
1988
JuneLRestrictions on tourist spending eased
OctoberLIntroduction of a positive system of exchange control
LSignificant relaxation of controls
1990
JanuaryLAbolition of restrictions on purchases of foreign securities by residents
MayAbolition of all remaining exchange control regulations
Japan
1960
JuneLControls on foreign direct investment eased
JulyLIntroduction of nonresident free yen accounts
1967
JulyLFurther easing in foreign direct investment regulations
1971
JulyLRestrictions on outward direct and portfolio investment eased
SeptemberTRestrictions on yen conversion of advance export receipts
1972
JuneTMarginal reserve requirement imposed on nonresident free yen accounts
OctoberTRestrictions on the purchase of Japanese securities by nonresidents
NovemberLRestrictions on portfolio outflows eased further
1973
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
1974
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
1977
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.
1978
MarchTMarginal reserve requirement on nonresident free yen accounts increased, further restrictions placed on portfolio inflows
1979
FebruaryLMarginal reserve requirement on nonresident free yen accounts abolished
FebruaryLRestrictions on nonresident purchase of bonds eased
MayLEasing of restrictions on portfolio flows
1980
MarchLEasing of restrictions on portfolio inflows
DecemberLRevision of Foreign Exchange and Foreign Trade Control Law
1983
JuneLLiberalization of short-term Euroyen lending by Japanese banks
1984
AprilLAbolition of requirement to link forward exchange transactions to trade
MayLPublication of Report on Yen/Dollar Exchange Issues
JuneLFurther easing of portfolio flows
1985
MayLAbolition of prior notification requirement for residents undertaking short-term borrowing in Euroyen
1986
AugustLEasing of limits on offshore investment by institutional investors
DecemberLJapanese Offshore Market (JOM) opened
1989
AprilLEasing of restrictions on flows of funds between JOM and domestic markets
1991
AprilLRestrictions on inward foreign direct investment eased
1998
AprilLIntroduction of Foreign Exchange and Foreign Trade Control Law
Netherland
1958
JulyLIssuance of general licenses for a number of types of outward capital movements
1961
OctoberLFurther relaxation of exchange controls
1963
DecemberLOpening up of Netherlands capital market for issuance of foreign guilder loans up to a ceiling
1966
OctoberLAbolition of “free market” for cross-border transactions in securities
1971
SeptemberTIntroduction of free market for bond transactions (“0-circuit”)
1972
MarchTProhibition of payment of interest on guilder deposits held by non-residents
1972
JulyTFurther tightening of exchange controls, affecting leads and lags and the taking up of foreign credit by residents
1974
FebruaryLAbolition of closed bond circuit
1976
JanuaryLAbolition of prohibition on paying interest on guilder deposits held by nonresidents
1977
SeptemberLSwitch over to a positive system of exchange control
LFurther easing of regulations concerning capital outflows
1981
MayLComing into force of the External Financial Relations Act, which supersedes the Exchange Control Decree of 1945
1983
JulyLAbolition of all remaining restrictions on capital inflows
1986
OctoberLAbolition of all remaining restrictions on capital outflows
LFull liberalization of all capital transactions.
New Zealand
1968
JanuaryTBorrowing in New Zealand by foreign companies resident in New Zealand and offshore borrowing by New Zealand companies require approval in all cases
1973
JuneTRestrictions on overseas borrowing by New Zealand companies tightened
1974
AugustLFinancial institutions allowed to borrow offshore for industrial development
1983
JanuaryTRestrictions on dealing in foreign exchange tightened
1984
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
1985
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
1989
AugustLInward direct investment rules eased
Portugal
1989
MarchLRelaxation of foreign travel allowances
SeptemberLRelaxation of controls on purchases of foreign securities by residents
DecemberLAbolition of prior authorization requirement of inward direct investment
1990
MarchLEasing of restrictions on acquisition of foreign securities
1991
JuneLLiberalization of direct and portfolio investment abroad
1992
SeptemberLAbolition of compulsory deposit requirement against foreign currency
DecemberLAbolition of all remaining exchange control regulations
Spain
1986
JuneLLiberalization of inward direct investment and right of establishment
NovemberLRelaxation of controls on outward direct investment
1987
OctoberLRelaxation of controls on foreign currency operations by commercial banks
1988
DecemberLLiberalization of outward direct investment and trade in medium-and long-term foreign securities
1989
JanuaryTImposition of nonremunerated reserve requirement on financial credits taken up abroad
SeptemberLPermission granted for residents to open accounts denominated in ECUs
1990
AprilLFurther relaxation measures
1991
AprilLAbolition of restrictions on opening of foreign currency accounts
1992
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
Sweden
1979
JanuaryLForeign-currency borrowing via banks permitted for trade financing
1980
JuneLLiberalization of controls on forward exchange dealing
1981LConditions for financing direct investment abroad from within Sweden made less restrictive
1983
AprilLTrading of foreign shares permitted on Swedish stock market
1984
FebruaryLEasing of restrictions on offshore borrowing by enterprises and local authorities
1985
MarchLRestrictions on forward dealing further liberalized
1986
JuneLAbolition of requirement to finance outward direct investment using foreign currency loans
1987
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
1989
JuneLAbolition of almost all remaining exchange controls
1990
DecemberLBranches of foreign banks permitted to participate in Riksbank’s clearing system on the same terms as Swedish banks
Switzerland
1971
JulyTImposition of 100 percent reserve requirement on marginal increases in nonresident deposit, and ban on interest payments on new nonresident deposits
1972
JulyTRestrictions on residents’ offshore borrowing imposed, nonresident purchase of securities and real estate prohibited, and “negative” interest rate introduced on marginal nonresident deposits
1973
OctoberLSuspension of negative interest rate on nonresident deposits
1974
NovemberTReintroduction of negative interest rate
1978
FebruaryTRestrictions placed on imports of foreign banknotes and purchase of domestic securities by foreigners
AprilTScope of deposits to which negative interest rate applied widened
1979
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
1980
FebruaryLBan on payment of interest on nonresident savings accounts lifted
AugustLAbolition of remaining restrictions on payment of interest on nonresident deposits
1982
JanuaryLEasing of issue requirements for foreign bonds
1984
JanuaryLLimits on foreign bond issues raised
1985
MayLLimits on foreign bond issues abolished
United Kingdom
1958
DecemberLSterling becomes convertible
1961
JulyTRestrictions on direct investment outside sterling area introduced
1967
AprilLEasing of restrictions on repatriation of nonresidents’ capital
1971
AugustTIntroduction of controls on portfolio inflows
DecemberLAbolition of controls on portfolio inflows
1975
JulyTEasing of capital controls vis-à-vis EEC members postponed
1976
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
1977
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
1978
JuneLEasing of restrictions on resident institutional investors investing in foreign currency securities
1979
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
1963
JulyTAnnouncement of introduction of Interest Equalization Tax (enacted 1964)
1965
MarchTIntroduction of voluntary guidelines limiting foreign lending and investment
1968
JanuaryTGuidelines limiting foreign direct investment made mandatory
1974
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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