Exchange Control is a foreign exchange policy measure that is taken to defend and protect the value of a country’s currency and the reserves that countries can have from it. A loss of value or devaluation can reduce the purchasing power of that currency and the value of its goods and services.
The devaluation can stagnate the economic growth of a country, although it is true that its goods and services are cheaper compared to abroad and therefore, encourage their demandand in some way, their competitiveness.
In exchange control, both quantitative and qualitative restrictions are imposed on capital inflows and outflows in order to protect the national currency. Therefore, intervention in the foreign exchange market is considered , since the market forces of supply and demand are set aside. Its effectiveness depends on the causes that have made it necessary, its objectives, its application and the way in which they operate in practice.
The reasons that can cause a change control can be the following:
- Falls of international reserves.
- Devaluation of the national currency and capital outflow due to speculation movements.
- Banking or financial crisis
Examples of control and intervention in exchange rates are found in Argentina with the dollar stock in Switzerland, with the elimination of the exchange barrier with respect to the euro located at 1.20, and in Ecuador, through taxes on the capital outflow by 5%.