Capital market integration: Exchange controls and exchange rate stability

Author(s): Worrell, DeLisle (1997)

Created 22 Jul, 1997
Categories Working Papers Delisle Worrell
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The recently signed Protocol II of the Caricom Treaty provides for the removal of capital controls between member countries in due course; however, it is not clear what this implies in a situation where some countries have no controls whatever on foreign exchange transactions and are therefore at a risk of contagion, speculation and currency instability. The paper asks whether removal of capital controls makes a significant advance in integrating Caricom capital markets and says why it is unlikely to do so. It distinguishes between effective exchange controls that discourage harmful speculation and exchange control failures which attempted to ration foreign exchange. Capital controls may contribute to currency stability and improve macro-economic management and warn of the danger of eliminating controls between countries with fixed and fluctuating exchange rates.

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