IMF Executive Board Discusses the Fund’s Role Regarding Cross-Border Capital FlowsPublic Information Notice (PIN) No. 11/1
January 5, 2011
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On December 17, 2010, the Executive Board of the International Monetary Fund (IMF) discussed a staff paper on the Fund’s Role Regarding Cross-Border Capital Flows.
Capital flows have grown to dominate international transactions for many countries, notably amongst advanced economies but also increasingly for emerging markets. They are therefore a central feature of the international monetary system, the stability of which lies at the core of the Fund’s mandate. This paper discusses ways in which the Fund could assist its members in framing a coherent approach to capital flows that supports growth and stability, and protects the integrity of the international monetary system. A broad agenda for future work is proposed.
Executive Board Assessment
Executive Directors welcomed today’s timely discussion of the Fund’s role on cross-border capital flows. They observed that capital flows have conferred substantial benefits by facilitating efficient resource allocation across countries, but prolonged episodes of high volatility have also presented serious policy challenges. Directors noted that volatile capital flows played a key role in the recent crisis, both in increasing vulnerabilities and in transmitting shocks across borders. Considering the Fund’s mandate to oversee international monetary stability, Directors agreed with the need to strengthen the Fund’s role regarding international capital flows. They called for further work to advance in bilateral and multilateral surveillance and policy advice for member countries, based on extensive analytical work and taking into account country-specific circumstances and relevant experiences.
Directors stressed that substantial analytical work is needed to develop a coherent Fund view and inform policy guidance on capital flows. Critical elements of this work include gaining a better understanding of the key drivers of capital flows and of developments in global liquidity, and the relationship between the latter, domestic policies, and global financial stability. Analytical work should also help to develop a clear view on whether and, if so, which macroprudential measures, microprudential measures, and/or capital controls might be appropriate in different circumstances. In this context, Directors welcomed work under way on Cross-Cutting Themes from Recent Country Experiences with Capital Flows as a basis for elaborating the Fund’s view on how to deal with capital inflows.
Directors observed that, despite the complex interdependences and channels for policy spillovers created by capital flows, there are no universal “rules of the road” governing such flows. This stands in contrast to arrangements governing trade in goods and services or international monetary arrangements. In this light, Directors saw merit in developing a coherent Fund view on capital flows and the policies that affect them. Such a view could help establish guidelines for the purposes of the Fund’s surveillance on capital account and possibly other policies affecting capital flows. Such guidelines should be designed in a way that leaves sufficient room for country-specific circumstances, and in particular acknowledge the difference between countries with open capital accounts and those that have yet to liberalize. These guidelines would be intended to provide guidance on the scope of existing obligations under Article IV.
Directors welcomed efforts to foster multilateral dialogue and policy coordination over cross-border capital flows. They noted that macroeconomic, financial, and capital account policies designed to address domestic concerns can have significant effects on other countries by generating or curtailing capital flows, or acting to divert them to third countries. They also recognized the scope for members to take divergent approaches in addressing any tensions created, and these could also have effects on others. Directors emphasized that the Fund has an important role in drawing attention to these potential spillovers, and the possible implications for the international monetary system as a whole. Directors supported efforts by the Fund to analyze and disseminate lessons from cross-country experiences in dealing with capital flows, and to foster dialogue with both originators and recipients of cross-border capital flows.
Most Directors agreed that filling data gaps—through existing initiatives where possible—will strengthen surveillance of cross-border flows. They called for the Fund to collaborate with other institutions, such as the Bank for International Settlements, the Financial Stability Board, and national authorities, in meeting this goal.
Directors expressed a wide range of views regarding amendment of the Articles of Agreement to provide a more complete and consistent legal framework for addressing issues related to capital flows. While a number of Directors were open to considering an amendment of the Articles in the future, most felt that it would be premature to initiate a discussion on this step without further analysis and practical experience.