IMF Executive Board Discusses the Multilateral Aspects of Policies Affecting Capital FlowsPublic Information Notice (PIN) No. 11/143
November 29, 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 November 14, 2011 the Executive Board of the International Monetary Fund (IMF) discussed a staff paper on “The Multilateral Aspects of Policies Affecting Capital Flows.”
The staff paper aims to draw greater attention to the multilateral aspects of policies affecting capital flows. It argues that the crisis showed national policies affecting capital flows can have multilateral consequences. A breakdown in the domestic stability of a large country can spill over into stress in other countries and even to the global system as a whole. The activities of global institutions and markets—some regulated and some not—can bear on the riskiness of flows. Thus, national policies affecting capital flows can transmit multilaterally –a fact that has not always been sufficiently appreciated by national policymakers.
The IMF staff paper is a building block in the work of the Fund towards formulating a comprehensive, flexible, and balanced approach for the management of capital flows, drawing on country experiences. Previous work by the Fund focused on the policies of recipient countries, and addressed the circumstances in which capital flow management measures (CFMs) would be appropriate. This paper revisits stylized facts related to global capital flows in the light of the recent crisis, stressing the key role of a small number of countries and financial institutions in “sourcing” global capital flows. Building on this, it provides an assessment of regulatory and supervisory policies of mainly source countries, as well as reserve currency issuing economies’ monetary policy. Moreover, it addresses the multilateral transmission of CFMs. Further work planned for early next year will cover capital account liberalization and managing capital outflows.
Executive Board Assessment
Executive Directors welcomed the opportunity to discuss the multilateral aspects of policies affecting capital flows, which they saw as another important step in developing a comprehensive perspective for the management of capital flows. Directors agreed that national policies, including prudential frameworks, have the potential to influence the riskiness of capital flows in a way that can affect cross-border stability. They noted, however, that national authorities may not fully appreciate the multilateral transmission of their policies and may not often internalize their cross-border effects.
Noting that policies of both source and recipient countries play a role in reaping the benefits of capital flows while limiting their risks, Directors concurred that national policymakers should pay more attention to the multilateral transmission of their policies, including with respect to prudential frameworks and monetary policy. In support of these efforts, Directors noted that the Fund, in accordance with its mandate, has an important role to play regarding capital flows in its bilateral and multilateral surveillance, including by monitoring global liquidity and cross-border flows, surveying international spillovers, fostering a multilateral dialogue and policy coordination over capital flows, and providing candid advice.
Directors agreed that before and during the crisis, shortcomings in regulation and supervision in source countries allowed banks and other market participants to take excessive cross-border risks that led to macrofinancial instability. More effective regulatory and supervisory policies in both source and recipient countries would help limit systemic stress, including its transmission via capital flows. Directors agreed that improved national prudential frameworks benefit all countries and the global system as a whole.
Directors stressed that prudential policies should be strengthened on both the national and international levels. They noted that completing and fully implementing the national and international regulatory and supervisory reforms now underway and developing new macroprudential frameworks will help reduce arbitrage opportunities and mitigate cross-border risks. Directors agreed that greater cross-border coordination, including of macroprudential policies, would help reduce the riskiness of capital flows. They called for more analysis to fully understand the drivers of global systemic risk and the implications for macroprudential policies and their coordination.
Directors concurred that the monetary policy of major central banks affects capital flows to other economies. Most Directors noted that, given the complicated transmission process, the case for major central banks to proactively consider in their monetary policy its multilateral effects is limited. Directors agreed that sound prudential frameworks in source countries would help mitigate the multilateral risks associated with global liquidity creation. A significant minority of the Board called for considering exchange rate flexibility in the analysis of recipient countries.
Most Directors agreed that the renewed interest in capital flow management measures suggests that their multilateral implications warrant attention, as CFMs could transmit multilaterally by increasing or decreasing capital flows to countries with similar characteristics. Directors noted, however, the lack of firm empirical evidence to date on the magnitude and direction of multilateral effects of CFMs. Most Directors agreed that a moderate use of CFMs has few implications for the overall riskiness of capital flows and global stability, noting, however, that CFMs, if they proliferate or intensify, would have escalating global costs. A few Directors noted that the likelihood that CFMs would proliferate is low, especially since it did not happen at the height of the current crisis, and some other Directors pointed to the importance of flexibility in recipient countries’ policies to mitigate risks without stigma attached to the use of particular instruments. Most Directors called on the Fund to continue to monitor CFMs and a few Directors requested regular publication of an overview of CFMs applied by countries.
Directors welcomed the Fund’s work on capital flows. In this connection, most Directors saw the elements in Box 6 of the staff report as a step in the right direction, with a number of Directors asking for further specificity. Looking forward, the next steps involve a paper on capital account liberalization and net capital outflows that will examine among other issues the multilateral effects of maintaining and liberalizing closed capital accounts by large countries. Another paper will draw together the previous, current, and planned work toward articulation of a comprehensive, balanced, and flexible Fund institutional view on policies affecting capital flows, drawing on country experiences, and thereby underpinning the provision of consistent and evenhanded policy advice, appropriate to country-specific circumstances.