## Managing Capital Flows: Macroeconomic Analysis and Policies (MCF)

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### Course overview and objectives
- The course is a two-week program devoted to fostering the understanding of the dynamics of capital flows and their effects on growth, macroeconomic volatility, and crisis risk.
- The course discusses policy options to reap the benefits of capital market integration while minimizing and mitigating adverse consequences.
- Through studies of actual crises, participants learn how policy settings and failures in recognizing and addressing the buildup of vulnerabilities lead to crisis, and what policies countries put in place to stabilize the economy and how the economy evolved and recovered.
- Topics include the benefits and costs of financial integration; the capital inflow problem; and models of currency crises and sudden stops of capital inflows.
- Workshops and case studies are important components to help participants grasp concepts and benefit from instructors’ experience.

### Learning objectives
- Participants will have a better understanding of the dynamics of capital flows, including the capital account, its liberalization, and its management.
- Participants will learn the policy options available to reap the benefits of capital market integration while mitigating adverse consequences.
- Participants will learn the main causes of capital account crises, how they evolve, their economic costs, and the challenges to stabilize the economy.
- Participants will learn policy options to reduce the risk of a financial crisis and how to respond to a financial crisis: macroeconomic policies, macro and micro prudential policies, and capital flow measures.
- Participants will also have a good understanding of the IMF’s Institutional View.

### Target audience, prerequisites, and evaluation
- Target audience: junior to mid-level policymakers in central banks and finance ministries with responsibilities related to capital account management, macro-prudential and micro-prudential policies, or macroeconomic policymaking.
- No prior specific knowledge of the material is assumed.
- Prerequisites: advanced degree in economics or equivalent experience, good quantitative skills, and a good knowledge of Excel.
- Performance evaluation: Two multiple-choice quizzes will be given. One quiz will be given at the beginning and the other one at the end of the course.

### Core units
- 0. Introductory Lecture
- 1. Balance of Payments: A refresher
- 2. Measuring Financial Integration
- 3. Long run Determinants of Capital Flows
- 4. Macroeconomic Volatility and Capital Flows
- 5. Capital Account Liberalization: Financial Reforms, Crises and Growth
- 6. Tracking, Interpreting, and Forecasting Capital Flows
- 7. Financial Crises: Why, When and How?
- 8. Dealing with Capital Flows

### Unit 1: Balance of Payments
- Outline of Lecture (1.5 hours)
  - The balance of payments and its components
  - Alternative representations of the balance of payments: standard vs analytical
  - The link between the balance of payments and the national accounts
  - The NIP and the balance of payments Principles of modern monetary policy
- Workshop on Balance of Payments (1.5 hours)
- Readings:
  - IMF, 2009, “Balance of Payments and International Investment Position Manual”.

### Unit 2: Measuring Financial Integration
- Outline of Lecture (3 hours)
  - Barriers to international capital flows
  - A de facto measure of financial integration
  - A de jure measure of financial integration
  - Measuring financial liberalization using prices
  - Global trends of international capital financial markets
  - The structure of external balance sheets of countries; financial risk
  - The exorbitant privilege
  - Global imbalances
- Workshop: No workshop
- Readings:
  - Chinn, Menzie D. and Hiro Ito (2006). "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," Journal of Development Economics, Volume 81, Issue 1, Pages 163-192 (October).
  - International Monetary Fund (2010, various years). Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), Washington, D.C., International Monetary Fund.
  - Philip R. Lane and Gian Maria Milesi-Ferretti (2007), "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970–2004", Journal of International Economics 73, November, 223-250.
  - Guonan Ma and Robert Neil McCauley, 2013, Is China or India more financially open? BIS, Working Papers No 410

### Unit 3: Long-run Determinants of Capital Flows
- Outline of Lecture (1.5 hours)
  - Review the predictions of the basic Neo-Classical Model
  - Welfare gains from financial opening: theory and empirical quantification
  - Introduce the standard puzzles regarding the direction of capital flows and the link between net inflows and growth
  - Discuss the existing empirical explanation for the standard puzzles
- Workshop: No workshop
- Readings:
  - Barro, Robert J & Mankiw, N Gregory & Sala-i -Martin, Xavier, 1995. "Capital Mobility in Neoclassical Models of Growth," American Economic Review, vol. 85(1), pages 103-15
  - Pierre-Olivier Gourinchas & Olivier Jeanne, 2006. "The Elusive Gains from International Financial Integration," Review of Economic Studies, vol. 73(3), pages 715-741.
  - Lucas, Robert (1990). "Why doesn't Capital Flow from Rich to Poor Countries?". American Economic Review 80 (2): 92–96
  - Pierre-Olivier Gourinchas & Olivier Jeanne, 2013. "Capital Flows to Developing Countries: The Allocation Puzzle," Review of Economic Studies, vol. 80(4), pages 1484-1515.

### Unit 4: Macroeconomic Volatility and Capital Flows
- Outline of Lecture (3 hours)
  - Push and Pull factors of capital flows
  - The link between capital flows and economic activity over the business cycle
  - Tools to identify credit booms
  - Examine whether the composition of capital flows matters
- Workshops: two workshops each of 1.5 hours, 3 hours in total
- References: (references listed in source)

### Unit 5: Capital Account Liberalization: Financial Reforms, Crises and Growth
- Outline of Lecture (3 hours)
  - Dual effects of capital account liberalization: growth vs. crisis
  - Empirical evidence on the growth and financial stability effects of capital account liberalization
  - Welfare economics of liberalization
  - Sequencing of reforms
  - IMF institutional view
  - Caveats and open questions about the sequencing approach
- References:
  - Bonfiglioli, Alessandra, Financial Integration, Productivity and Capital Accumulation, Journal of International Economics 76, 337-355 (December 2008)
  - Kalantzis Y., “Financial fragility in small open economies: firm balance sheets and the sectoral structure" (forthcoming), Review of Economic Studies (forthcoming)

### Unit 6: Tracking, Interpreting, and Forecasting Capital Flows
- Lecture (1.5 hours)
- Workshop (1.5 hours)
- References:
  - Koepke Robin, 2015, What Drives Capital Flows to Emerging Markets? A Survey of the Empirical Literature, Institute of International Finance, Working Paper
  - BIS 2009. “Capital Flows and Emerging Market Economies.” CGFS Papers No. 33.

### Unit 7: Financial Crisis: Why, When and How?
- Outline of Lecture (1.5 hours)
  - What is a crisis? What is common to all crisis?
  - Varieties of financial crises
  - Twin and Triple crises
- Workshop: Case Studies – Varieties of Crises (3 hours)
  - Crises studied: Asia, Iceland, and Hungary
- Readings:
  - Kaminsky, Graciela, 2006. “Currency crises: Are they all the same?" Journal of International Money and Finance 25,3, 503–527
  - Laeven, Luc, and Fabian Valencia, 2008. "Systemic banking crises: a new database" IMF Working Papers 08/224
  - Reinhart, Carmen and Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, 101(5), 1676-1706
  - Graciela L. Kaminsky and Carmen M. Reinhart, 1999. "The Twin Crises: The Causes of Banking and Balance-Of-Payments Problems", 89, 73-500

### Unit 8: Dealing with Capital Flows
- Outline of Lecture (4.5 hours)
- Macroeconomic Policy
  - Fiscal and Monetary Policy
  - Exchange rate policy
  - Policy mix
- Financial Regulation
  - Idiosyncratic and systemic risk
  - Capital flows and financial stability
  - Microprudential tools
  - Macroprudential tools
  - Macroprudential policy vs. capital flow management
- CFM and FX Interventions
  - Rationale for capital controls
  - Modalities: administrative, taxes, reserve requirements
  - Effects on flows, maturity, exchange rates, interest rates, cost of lending for different borrowers
- Readings:
  - Valentina Bruno, Hyun Song Shin (2015) Assessing Macroprudential Policies: Case of Korea
  - Olivier Jeanne & Anton Korinek, 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," NBER Working Papers 16377
  - J. Ostry, A. Ghosh, M. Chamon, M. Qhreshi (2011) Capital Controls: When and Why IMF Economic Review
  - Magud, Nicolas E., Carmen Reinhart, and Kenneth S. Rogoff. 2011. “Capital Controls: Myth and Reality – A Portfolio Balance Approach.” NBER Working Paper 16805

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_Source: https://www.imf.org/-/media/files/icd/mcf.pdf_