Capital controls, once considered the enemy of free trade and open markets, should be viewed as a useful tool for managing financial stability that can work alongside conventional monetary policy, according to research from two regional Federal Reserve Bank economists.

Financial markets in many developing economies have been roiled in recent years by large floods of money flowing in and out. Rapid inflows can fuel asset bubbles and push up currency values, hurting a country’s exports. Rapid outflows can cause asset prices and currencies to plummet. Many governments have adopted measures to limit such rapid capital movements, but the moves have been controversial.

“The adoption of temporary capital controls can lead to a significant welfare improvement,” Scott Davis of the Federal Reserve Bank of Dallas and Ignacio Presno at the Boston Fed argue in the new paper. “The benefits of capital controls are present even when monetary policy is determined optimally, implying that there may be a role for capital controls to exist side-by-side with conventional monetary tools as an instrument of monetary policy.”