- CFA Exams
- 2024 Level I
- Topic 2. Economics
- Learning Module 7. Capital Flows and the FX Market
- Subject 3. Capital Restrictions
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Subject 3. Capital Restrictions PDF Download
Trade in assets (capital flows) provides substantial economic benefits by enabling residents of different countries to capitalize on their differences. Capital flows enable countries to borrow in order to improve their ability to produce goods and services in the future. Other benefits include the technology transfer that often accompanies foreign investment and the greater competition in domestic markets that results from permitting foreign firms to invest locally.
The benefits of capital flows do not come without a price, however. Because capital flows can complicate economic policy or even be a source of instability themselves, governments have used capital restrictions to limit their effects.
Capital restrictions are designed to limit or redirect capital account transactions. Countries use capital restrictions to maintain balance of payments, control exchange rate, preserve domestic savings for domestic use, and protect infant industry.
Capital restrictions include prohibitions on investment by foreigners, taxes on the income earned on foreign investments by domestic citizens, quantity restrictions on capital flows, and prohibition of foreign investment in certain domestic industries.
As capital restrictions are often used in conjunction with other policy instruments, their effectiveness often has mixed results.
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