| Externalities of Capital Flows and Justifications for Capital Controls Xinhua Gu, Faculty of Business Administration, University of Macau, Taipa, Macau, China Li Sheng, Institute for Tourism Studies, Colina de Mong H�, Macau,China Issue 37 (Vol. 19, No. 1), June 2009, pp. 13-26. This paper discusses some significant facts about negative externalities generated by free capital flows, and analyzes certain justifications for the use of capital controls as an efficiency- enhancing tool to limit the external costs. This intervention tool, imperfect though it is, can limit the deviation of private equilibrium from social optimization by improving the composition of capital flows and alleviating their distorted incentive for externality creation. To avoid financial turbulence or economic crises, we urge emerging-market economies such as China to stay away from the damaging influences of free-market ideology and seriously reconsider the merits of capital controls. |