All of us remember the famous speech at IGIDR by Y V Reddy on 12 January 2005 where he expressed interest in more capital controls [link to speech, the next day's front page comment by Ila Patnaik]. In India's case, this yearning ended at the speech stage.
A natural experiment in the introduction of such restrictions took place in Thailand last week. A Chilean-style unremunerative reserve requirement [link] was announced by Thailand's central bank on Monday (18th). The government backed away from this on 19th (Tuesday), after stock prices crashed by 15% [link, link].
I wrote an article Adventures of the Baht in Business Standard on this drama, after their announcement of the reserve requirement but before they backed away from it.
I think that the first best world is one with no capital controls. The second best world is one with no capital controls and this unremunerative reserve requirement; it is better than the intricate system of quantitative restrictions (QRs) which we have as a system of capital controls in India. The Thais may have made mistakes in exactly how they went about trying to do it. The bottom line in this episode is one more central bank with a bloodied nose.
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