Review of The Institutional View on The Liberalization and Management of Capital Flows — Background Note on Using the IPF Analytical Toolkit to Enhance Policy Assessments

Policy Papers, March 30, 2022

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Review of The Institutional View on The Liberalization and Management of Capital Flows — Background Note on Using the IPF Analytical Toolkit to Enhance Policy Assessments

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Bibliographic details

• Authors: Marcin Kolasa, Gurnain Kaur Pasricha, Suman S Basu, Emine Boz, Dimitre Milkov
• Published: March 30, 2022
• Series: Policy Papers
• DOI: https://doi.org/10.5089/9798400206528.007

Summary insights

• Insights from the IPF workstream can help guide the appropriate policy mix during an inflow surge, based on the shock and country characteristics.
• Inflow surges may be caused by a range of shocks and can take different forms in different countries.
• The IPF models suggest that warranted macroeconomic policy adjustments depend on the nature of the shock and country characteristics.
• The IPF models point to shocks and country characteristics that make it difficult to effectively respond to surges using only macroeconomic policy and exchange rate adjustment.
• The IPF models illustrate how surges can lead to a build-up of systemic financial risks.
• The IPF workstream connects the appropriate mix of MPMs and CFM/MPMs to the structure of the country's financial system.

IPF model findings

• Warranted macroeconomic policy adjustments depend on:
  • the nature of the shock, and
  • country characteristics.
• Certain shocks and country characteristics make it difficult to effectively respond to surges using only:
  • macroeconomic policy, and
  • exchange rate adjustment.
• In the presence of overheating and overvaluation, the IPF models suggest that:
  • the use of FXI and CFMs can enhance monetary autonomy in certain circumstances without generating other distortions.
• The relative costs and benefits of FXI and CFMs depend on country-specific factors.

Policy implications and recommendations

• Use IPF model insights to tailor the policy mix during inflow surges to the identified shock and country characteristics.
• Consider combining macroeconomic policy, exchange rate adjustment, and capital flow measures when:
  • shocks and structural features limit the effectiveness of macro policy and exchange rate responses alone.
• Where overheating and overvaluation are present, evaluate FXI and CFMs as tools to enhance monetary autonomy, weighing:
  • country-specific costs and benefits,
  • potential trade-offs and distortions.

Financial stability considerations

• Surges can lead to a build-up of systemic financial risks, according to the IPF models.
• The appropriate mix of MPMs and CFM/MPMs should be linked to the structure of the country's financial system to mitigate systemic risk.

Source: Review of The Institutional View on The Liberalization and Management of Capital Flows — Background Note on Using the IPF Analytical Toolkit to Enhance Policy Assessments (Policy Paper No. 2022/012).

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