Central banks, monetary stability, and the varieties of capital control liberalization

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Abstract This article explores the differential liberalization of capital controls in advanced market economies. It shows that although finance-led economies abolished controls by the 1980s, export-led economies retained significant restrictions into the 1990s, contributing to differential financial market development. A historical comparison of Germany and the UK (1961–1985) finds that differential control use resulted from central bankers’ varying expectations of controls’ monetary functions in the domestic economic context. As capital became mobile in the 1960s, sudden capital in- and outflows jeopardized price and currency stability. In the German context of macroeconomic stability, controls effectively limited capital inflows and arrested destabilizing inflationary and exchange rate pressures. However, in the British context of macroeconomic instability and capital outflows, controls could not sufficiently restore stability: as loose fiscal and monetary choices persisted, monetary conditions deteriorated. Thus, Bank of England officials became fervent advocates for control liberalization to enforce restrictive fiscal and monetary choices via market pressures.