Capital Flows and Foreign Exchange Regimes in the Colombian Economy

Since 1993, the Colombian Central Bank introduced a compulsory non-remunerated reserve requirement on capital inflows, which can be characterized as a Tobin tax. The main purpose of this paper is to evaluate the rationale and the effectiveness of this pricebased mechanism to regulate international capital flows. We defend the idea that those regulations were effective, although, of course, they were just a marginal element affecting the whole macroeconomic environment. We argue that they contributed to reduce the economic vulnerability associated with short-term foreign capital flows. Also, they helped authorities in managing the trade off between avoiding an excessive appreciation of the domestic currency and, at the same time, keeping control on the domestic interest rates in order to discourage an excessive level of expenditure in the economy.