Supporting countries reap the benefits of capital flows while managing risks to economic and financial stability
The IMF first adopted the Institutional View in 2012 at a time when many emerging markets were contending with large and volatile capital flows. It sought a balanced and consistent approach to issues of capital account liberalization and capital flow management.
The 2012 Institutional View recognized as a core principle that capital flows are desirable because they can bring substantial benefits to recipient countries, but they can also result in macroeconomic challenges and financial stability risks. The framework incorporated measures to restrict the flow of capital through capital flow management measures (CFMs), some of which may also be macroprudential measures (MPMs) and are therefore named CFM/MPMs, in a limited manner.
The 2022 Review of the framework expands the toolkit available to policymakers by allowing the pre-emptive use of CFM/MPMs on inflows in the presence of stock vulnerabilities that threaten economic and financial stability, including in the absence of a capital inflow surge.
The Review updates the 2012 Institutional View with advances in research and policy experience. It also expands policymakers’ toolkit by allowing the pre-emptive use of CFMs/MPMs on capital inflows.
This paper provides additional insights into the benefits and risks from capital flows to both source and recipient countries and into the channels through which these materialize.
This paper provides the analytical underpinnings for the appropriateness of the preemptive use of CFM/MPMs. It illustrates the sources of systemic risks from FX mismatches, the proposed approach to assess such risks, and examples of relevant information and tools.
Preemptive CFM/MPMs should be targeted, calibrated to risks, transparent, and as temporary as possible. The appropriate design depends on country circumstances.
Insights from the IPF workstream can help guide the appropriate policy mix during an inflow surge, based on the shock and country characteristics.
