This paper provides evidence on the effects of capital controls. We show that controls have
been associated with significant differences in macroeconomic behavior, especially in
monetary policy. While they have not prevented speculative attacks, they have provided the
breathing space needed to organized orderly realignments. We also provide evidence on the
channels through which speculative attacks operate, showing that bank lending to nonresidents
is a key transmission mechanism. We conclude with a discussion of measures that mimic
some of the effects of controls as a way of easing the transition to European Monetary Union.
Non-interest-bearing deposit requirements on lending to nonresidents are proposed as a thirdbest
route to monetary union.
