IMF Survey: IMF Develops Framework to Manage Capital Inflows
IMF News, April 5, 2011
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- Published: April 5, 2011
Overview
- Publication: IMF Survey online
- Date: April 5, 2011
- Purpose: To present IMF research and a pragmatic, experience-based framework to help countries manage large capital inflows as they recover from the global crisis.
Purpose and scope of the framework
- Help countries manage large capital inflows and assess risks facing leading economies.
- Provide a structured approach to weigh policy responses, choose from a menu of options, and determine appropriate circumstances to consider taxes, certain prudential measures, and capital controls (collectively “capital flow management” measures).
- Part of broader IMF work to enhance coverage, candor, and evenhandedness of IMF policy advice and to strengthen evaluation of advanced economies.
Policy toolkit and research released
- Two studies released:
- Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy Framework: looks at country cases and suggests a framework of measures including macroeconomic policies, tax and prudential measures, and capital controls.
- Managing Capital Inflows: What Tools to Use: provides analytical underpinning to the Fund’s research on the topic.
- Capital controls: now recognized as part of the policy toolkit and can be used on a case-by-case basis, in appropriate circumstances.
Key risks from surges in capital inflows
- Rapid currency appreciation.
- Buildup in financial sector fragilities, including asset price bubbles or rapid credit growth.
- Risk of a sudden stop or reversal of inflows.
Foundational principles of the organizing framework
- 1. No “one-size-fits-all”. The right policy mix will depend on each country’s circumstances, including the state of the domestic economy and the nature and magnitude of the capital inflows.
- 2. Structural reforms are always encouraged. Policies designed to increase the capacity of the economy to absorb capital inflows for example, by creating deeper domestic capital markets should be pursued under all circumstances.
- 3. There are no substitutes for the right macro policies. Any response has to give primacy to macroeconomic policies. Measures specifically designed to influence inflows cannot be a substitute for the implementation of appropriate macroeconomic policies.
- 4. Capital controls are part of the policy toolkit. As explained recently by the Managing Director, capital controls can be used on a case-by-case basis, in appropriate circumstances.
- 5. Design the medicine to treat the ailment. Capital flow management measures should match the specific macroeconomic or financial stability concerns in question. In general, these measures should maximize efficiency and minimize distortions, and should be withdrawn when risks recede.
- 6. Think of others. Policies that might affect the external stability of other countries and, by extension, global financial stability or growth prospects, should be discouraged. In this regard, the framework suggests giving preference to measures that do not discriminate on a residency basis. This reflects the Fund’s multilateral mandate to promote systemic stability and foster global policy coordination.
Analysis of external spillovers and “push” forces
- The IMF is studying the originators of capital flows, known as the “push” forces.
- Reports on spillovers (effects that policies in one country or group of countries might have on others) are being prepared for the world’s five largest systemic economies: China, the euro area, Japan, the United Kingdom, and the United States.
Implementation, evaluation, and future work
- The effectiveness of the policy framework will be analyzed and adjusted over time, particularly in light of cross-border impacts.
- Country experiences in managing capital flows will be covered in forthcoming IMF research and in the upcoming Regional Economic Outlooks, to be issued in late April and May.
Source: IMF Survey: IMF Develops Framework to Manage Capital Inflows (April 5, 2011).