The New Economics and Politics of Cross-Border Finance Regulation

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Not long ago capital controls were widely tarred as necessarily distortionary and a hindrance to a well-functioning open global economy. Yet in the wake of financial crises, new economic thinking, and shifting political balances, prudential capital account regulation is (re)emerging as an important policy tool.

On 2 July Kevin Gallagher, Associate Professor of International Relations at Boston University, visited GEG to present ongoing research on the regulation of cross-border financial flows. Professor Gallagher argued that such policies are crucial in limiting asset bubbles which could arise from investors seeking to exploit interest-rate differentials between industrialized and emerging economies. He also noted that while many previous defenders of full capital account liberalization, including the IMF, have revised their views over the past five years, there are still powerful interests who oppose capital account regulation, including the financial sectors in both advanced and developing countries. As new financial regulations are debated and implemented at both the international (e.g., Basel III) and domestic (e.g., the Dodd-Frank Act in the US) level, this is a crucial period for the fight over the future use of prudential capital account regulation.