The Multilateral Aspects of Policies Affecting Capital Flows

Policy Papers, October 13, 2011

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The Multilateral Aspects of Policies Affecting Capital Flows

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Bibliographic details

• Published: October 13, 2011
• Series: Policy Papers

Executive summary

• The crisis is prompting a reconsideration of capital flows and the policies that affect them.
• 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.
• National policies affecting capital flows can transmit multilaterally; this transmission has not been fully appreciated by national policymakers.
• National policymakers may not have incentives to take full account of the cross-border effects of their policies.
• The upward trend in the volume of capital flows can be expected to continue, making it ever more important to address the associated cross-border risks.

Purpose and scope of the paper

• Aim: to draw greater attention to the multilateral aspects of policies affecting capital flows.
• Complementarity: Previous Fund work focused on policies of recipient countries, mainly emerging market economies (EMEs), and addressed the circumstances in which capital flow management measures (CFMs) would be appropriate.
• This paper provides a complementary assessment of:
  • regulatory and supervisory policies of advanced economies;
  • large advanced economy monetary policy;
  • the multilateral transmission of CFMs.

Key themes and findings

• Spillovers and systemic risk:
  • Domestic instability in a large country can create stress that spills over to other countries and the global system.
• Role of global institutions and markets:
  • Both regulated and unregulated global institutions and markets influence the riskiness of capital flows.
• Policy transmission and incentive problems:
  • National policies affecting capital flows can have cross-border effects that are not fully internalized by national policymakers.
  • Policymakers may lack incentives to take full account of these cross-border effects.
• Emerging trend and policy urgency:
  • The upward trend in the volume of capital flows is expected to continue, increasing the importance of addressing associated cross-border risks.

Policy implications and areas for attention

• Need for greater multilateral perspective in designing policies that affect capital flows.
• Assessment and possible calibration of:
  • regulatory and supervisory frameworks in advanced economies;
  • monetary policy in large advanced economies;
  • the design and potential cross-border effects of capital flow management measures (CFMs).
• Importance of international cooperation and surveillance to manage cross-border externalities from national policies.

Content in this bundle

• The Multilateral Aspects of Policies Affecting Capital Flows; IMF Policy paper; October 13, 2011
  • The Multilateral Aspects of Policies Affecting Capital Flows; IMF Policy paper; October 13, 2011 (Markdown version)
  • The Multilateral Aspects of Policies Affecting Capital Flows; IMF Policy paper; October 13, 2011 (PDF)