ABSTRACT
This chapter looks at issues of volatile capital flows in a small open economy. It outlines the Malaysian experience in using capital controls as safeguard measures to manage excessive capital flows to restore financial stability. The chapter goes on to assess the implications of controls as an instrument of policy. Given the experiences of different countries, the chapter makes a case for use of controls as a second-best choice under certain circumstances. Given that markets tend to view exchange and capital controls adversely, the chapter emphasises the importance of ensuring that controls, once imposed, are effective. The importance of preconditions and success factors to ensure that controls meet their objectives cannot be underestimated.
