depreciate in the face of outflows ), thereby contributing to external balance and damping further such flows by altering asset valuations. increased exchange rate flexibility should also discourage excessive currency mismatches, as market participants better gauge the risks of future currency movements. notably, in some cases, volatile capital flows have been a symptom of deeper distortions within the recipient country, and addressing these distortions has required a shift in the underlying mix of the country's policies. past experience also highlights that attempts to limit financial openness are themselves imperfect. clearly, capital controls can influence capital flows if applied with enough force. but how effective are they and at what cost? the chilean controls on capital inflows during the 1990s are often cited as an example of an approach that other countries might use. but studies of these controls, including by staff members at the central bank of chile itself, suggest that the success of the chilean controls was mixed. the controls did shift the composition of flows away from assets with shorter maturities, but the effects on the volume of flows and the exchange rate – two key goals of the controls – are less clear. 7 some evidence also suggests that the controls harmed small firms in chile by reducing the availability of financing and raising interest rates. 8 in addition, the incentives to circumvent capital controls are powerful when the returns that these flows might reap are large. in the extreme, controls can lead to rent - seeking behavior or, worse, result in corruption among public officials. 9 controls can also result in unintended distortions in prices in other financial markets or in goods prices as investors use those markets to try to move funds into or out of a country. moreover, global capital flows have increased dramatically in recent decades. although these substantial flows are the very reason that many countries wish to impose capital controls, the size of the flows – as well as the sophistication of investors who might seek to circumvent controls – means that countries that avoid opening up may face higher and higher costs in trying to control them. finally, capital controls have global implications, as restricting financial openness can impede current account adjustment and thus hinder the world economy from reaching a more balanced equilibrium. indeed, as i have noted in an earlier speech, the current international monetary system is a mixture of economies, some with open capital accounts and flexible exchange rates, and others with managed exchange rates, more - restricted see edwards ( 1999 ) and

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