Controlled Capital Account Liberalization: A Proposal
IMF Policy Discussion Papers, October 1, 2005
Source details
- Canonical URL
- Controlled Capital Account Liberalization: A Proposal
Other formats
Bibliographic details
- Authors: Eswar S Prasad, Raghuram Rajan
- Published: October 1, 2005
- Series: IMF Policy Discussion Papers
- DOI: https://doi.org/10.5089/9781451975741.003
Proposal overview
- Develops a proposal for a controlled approach to capital account liberalization for economies experiencing large capital inflows.
- Core mechanism: securitize a portion of capital inflows through closed-end mutual funds that:
- issue shares in domestic currency,
- use the proceeds to purchase foreign exchange from the central bank,
- invest the proceeds abroad.
Mechanism and operational features
- Closed-end mutual funds buy foreign exchange from the central bank using domestic-currency share proceeds.
- Funds then invest the purchased foreign exchange abroad.
- Central banks retain control over the timing and quantity of capital outflows via the fund issuance process.
Expected benefits and effects
- Eliminates the fiscal costs of sterilizing those inflows.
- Gives domestic investors opportunities for international portfolio diversification.
- Stimulates the development of domestic financial markets.
- Allows central banks to manage capital outflows in a controlled manner.
Role within broader policy framework
- Can be part of a broader toolkit to liberalize the capital account cautiously when external circumstances are favorable.
- Not a substitute for:
- strengthening of the domestic financial sector,
- in some cases, greater exchange rate flexibility.
- Could help create a supportive environment for those essential reforms.
Key findings and emphases
- Proposal focuses on controlled liberalization during episodes of large capital inflows.
- Emphasizes central-bank control of outflows and minimizing fiscal sterilization costs.
- Highlights investor diversification and domestic market development as ancillary benefits.
Content in this bundle
- _pdp07 - Section 1 and Section 2