Capital Flows

Abstract

Movements of capital between countries necessarily involve effects on the domestic economies of the countries concerned. The effect of short-term speculative fund movements is one aspect of this and has been analysed in detail by Clendenning among others.¹ In this chapter the aim is to examine the effects of long-term capital movements whether through the medium of the eurocurrency, eurobond or foreign markets. The effect of short-term speculative fund movements will only be considered indirectly. An examination of these effects can only be undertaken however along with a consideration of exchange controls and their role in regulating such flows, for in a world without such controls, the international markets would be radically different. If such controls were tightened and fully enforced by all countries so as to make the movement of long-term capital impossible, then of course the international markets would cease to exist. The mere existence of controls in almost all countries on either inflows or outflows of funds (or both) suggests prima facie that such movements may have potentially damaging effects on countries subject to them.