Managing Large-Scale Capital Inflows: The Case of the Czech Republic, Poland and Romania

IMF Working Papers, May 1, 2012

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Many emerging market economies have in the recent past experienced a surge in capital inflows that may threaten their economic and financial stability.
The IMF in early 2011 proposed a framework intended to guide Fund advice to policymakers on how to best respond to such inflows, including both macroeconomic instruments and so-called capital flow management measures (CFMs).
The paper applies this framework to three countries that have experienced elevated capital inflows after the onset of the 2008 global financial crisis - the Czech Republic, Poland, and Romania.
The evaluation of the macroeconomic criteria as prescribed by the framework does not support the use of CFMs, but instead advocates macroeconomic policies as the first line of defense against large-scale capital inflows.
This finding is by and large consistent with the IMF’s policy advice given to country authorities in the context of surveillance missions.

The paper applies the IMF’s early 2011 capital inflows framework to three Eastern European countries: the Czech Republic, Poland, and Romania.
The framework’s macroeconomic criteria, when evaluated for these countries during the post-2008 period of elevated inflows, do not support the use of CFMs.
Macroeconomic policies are recommended as the primary response to large-scale capital inflows in these cases.
The paper’s conclusions align with IMF policy advice provided in surveillance missions to the countries examined.

Prioritize macroeconomic policies as the first line of defense against large-scale capital inflows rather than resorting to capital flow management measures (CFMs) in the cases examined.
Use the IMF’s framework for assessing macroeconomic criteria when advising policymakers on responses to elevated capital inflows.

Subject: Balance of payments, Capital controls, Capital inflows, Central banks, Exchange rates, Foreign exchange, Inflation, Prices, Reserves accumulation
Keywords: assessment methodology, capital controls, capital inflows, capital inflows framework, Eastern Europe, economy, exchange rate, Exchange rates, Global, IMF Policy recommendation, IMF report, IMF staff, Inflation, monetary policy, policy advice, Reserves accumulation, WP