The Institutional View on Liberalization and Management of Capital Flows
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Background and purpose
- The IMF first adopted the Institutional View in 2012 to provide a balanced and consistent approach to capital account liberalization and capital flow management at a time when many emerging markets faced large and volatile capital flows.
- The framework recognizes that capital flows are desirable because they can bring substantial benefits to recipient countries, while also posing macroeconomic challenges and financial stability risks.
Core principles and scope
- Capital flows deliver substantial benefits to recipient countries but can create macroeconomic and financial stability risks.
- The framework permits the limited use of capital flow management measures (CFMs), some of which may also be macroprudential measures (MPMs), collectively referred to as CFM/MPMs.
- The 2012 Institutional View incorporated measures to restrict capital flows in a limited manner where appropriate.
2022 Review — key expansion
- The 2022 Review updates the 2012 Institutional View using advances in research and policy experience.
- The Review expands policymakers’ toolkit by allowing the pre-emptive use of CFM/MPMs on inflows in the presence of stock vulnerabilities that threaten economic and financial stability, including when there is no capital inflow surge.
Analytical underpinnings and risk assessment
- Assessing systemic financial stability risks due to FX mismatches provides the analytical rationale for the preemptive use of CFM/MPMs.
- The assessment framework illustrates:
- Sources of systemic risks from FX mismatches.
- An approach to assess such risks.
- Examples of relevant information and tools for evaluation.
Design principles for preemptive measures
- Preemptive CFM/MPMs should be:
- Targeted.
- Calibrated to risks.
- Transparent.
- As temporary as possible.
- Appropriate design of measures depends on country circumstances.
Policy guidance and toolkit use
- Insights from the IPF Analytical Toolkit can guide the appropriate policy mix during an inflow surge, tailored to the nature of the shock and country characteristics.
- The Review and supporting analysis expand the range of policy options available to support countries in reaping benefits from capital flows while managing associated risks to economic and financial stability.
References