Transcript

Transcript of a Conference Call on Capital Inflows

April 5, 2011

MS. LOTZE: Good morning, everybody, and welcome to this call on capital flows. You’ve seen the various documents under embargo: the Board Paper on recent experiences in managing capital inflows and the Staff Discussion Note on managing capital inflows: tools to use.

I have most of the authors here include the lead authors, which I will quickly run through and introduce. When they speak, they will tell you who they are so you don’t get confused. And then we will have two opening statements from Aasim and from Jonathan to talk about their respective papers, and then we’ll go to your questions.

So, let me just introduce all the people around the table here. So, we have Aasim Husain, Senior Advisor of the Strategy Policy and Review Department. With him is Reza Baqir; he is Deputy Division Chief of the Emerging Markets Division in the same department, SPR. Then we also have Varapat Chensavasdijai; he is a senior economist, also in the SPR. Next is Jonathan Ostry, who is the Deputy Director of the Research Department; Rex Ghosh, the Chief of the Systemic Issues Division in the Research Department; and Karl Habermeier, Assistant Director in the Monetary and Capital Markets Department.

Let’s begin with Aasim and his opening remarks. Thank you.

MR. HUSAIN: Thank you, Conny. Let me talk about the paper entitled “Recent Experiences in Managing Capital Inflows.”

So, the IMF has developed a conceptual framework on how best to manage capital inflows. The framework, which is laid out in the board paper being published today, titled “Recent Experiences in Managing Capital Inflows,” represents the Fund’s institutional view. There is now broad recognition that under the right circumstances, capital flow management measures are very much part of the policy toolkit for managing inflows.

This framework brings together a large volume of work in the Fund over the past year or so. That includes a Board Paper published late last year on the Fund’s role in cross border flows; a Staff Position Note early last year on the role of controls; the analytical staff note on what tools to use that Jonathan will tell you about in a few moments; and a number of other staff papers that will be coming out in the next few weeks and months.

What makes the framework in the Board Paper and the views of member countries, which are summarized in the accompanying PIN—or Public Information Notice—that you have before you—what makes this important is that they represent the consensus view of the institution and are endorsed by the majority of the membership, that is, by policymakers who are in charge of these issues.

Now, let me speak a little about why the framework is important now. The short answer is because large-scale capital inflows are back. Emerging markets have again become the darling of investors with nearly half of the 48 countries covered in our paper now experiencing what we call a surge in inflows. What’s also noticeable is the speed with which inflows have picked up, reaching 6 percent of GDP in only three quarters. And this time around, portfolio flows, which traditionally have been more volatile, make up half of the inflows.

Now, capital inflows clearly bring benefits in terms of growth and investment for recipient countries. But we also know only too well that a surge in inflows can pose major challenges, such as excessive currency appreciation or a buildup in financial sector fragilities due to a boom in credit or asset prices. A sudden stop or reversal inflows could cause financial and macroeconomic stress.

So, that brings me to what the framework says. Let me point you first to exactly where you can find the framework in the paper. In its briefest form, it is contained, in summary, in box 1 on page 7. For more details, you can turn to paragraphs 42 to 58 and for background to the overview in the Introduction section at the beginning.

Now, let me turn briefly to describe the key elements of the framework.

First, structural measures to help absorb inflows, like measures to deepen capital markets, are always good. But they can take a long time to bear fruit. So, they might not be helpful as a short-term response to an inflow surge.

Second, getting macro policies right is key. This means allowing the exchange rate to appreciate if it is undervalued, building reserves if they are inadequate, and rebalancing the fiscal monetary policy mix to stem overheating or inflation pressures.

Third, if macro policies and circumstances are right, capital flow management measures can be used side by side with macro policy responses. They are very much part of the policy toolkit. But they should not be used to avoid needed macro policy adjustments.

So, what are these measures, and what type should be used?

The paper uses the term “capital flow management measure,” or CFM for short, to cover tax, prudential, or administrative measures that are designed to affect inflows. This terminology tries to get away from the terms “macro prudential measures” versus “capital controls,” which have often been used interchangeably and incorrectly.

Now, within CFMs—what we call CFMs—the framework suggests that measures that don’t discriminate on the basis of residency are generally preferable, consistent with the international cooperative spirit of participation in an institution like the IMF.

Now, the last issue I want to turn to is how will we use the framework. This framework will be used by the Fund as a basis for providing policy advice to all member countries, advanced economies and emerging markets alike, which are facing large capital inflows. The actual advice for an individual country will depend also, of course, on its own circumstances. Thus, the paper does not and cannot make assessments for individual countries. Instead, such assessments will be taken up in country reports where these issues are relevant, and the analysis will be underpinned by this framework.

I should emphasize that this framework is really just a first step. It provides the basis for the Fund to give consistent, evenhanded, and predictable policy advice to all its members. Over time, it will be refined and adjusted based on experience. And of course this framework relates to only one side of the capital flow story. Clearly, the onus of adjustment lies both with the source and recipient countries, as the paper recognizes. Work on the other side—that is, on the effects of policies in source countries, such as loose monetary policy—is also underway. One element of this work is the upcoming spillover reports, which will assess policy spillovers from the largest economies to the rest of the world.

Let me end with emphasizing the bottom line from the work we’re sharing with you today. CFMs are very much part of the policy toolkit. In the right circumstances, they can and should be used alongside macro policy responses to manage surging capital inflows.

MR. OSTRY: Good morning, and thank you. I want to focus my remarks on the analytical work that lies behind the paper that my colleague spoke about.

This work has been ongoing for a while. Some of you will recall the paper we released last year on capital inflows, “The Role of Controls.” That paper set out a number of conditions that should be satisfied before resorting to capital controls. These are, in essence, the very conditions described by my colleague, the need to ensure that the exchange rate is not undervalued from the multilateral perspective and that reserves and monetary and fiscal policies are consistent with, respectively, prudential norms, internal balance, public debt sustainability.

This is the idea of exhausting macro policy space as the first line of defense against inflow surges. It is front and center not only because macro instruments, especially the exchange rate, are central to help abate the inflows, but also because the imposition of controls in circumstances where macro policy space remains is, in effect, a beggar-thy-neighbor policy. It is likely to result in flows being diverted to countries less well-placed to absorb them and thereby to undercut global external adjustment.

But the macro response is not the whole story. And in some circumstances, other elements of the toolkit, such as prudential measures and capital controls, may also need to be considered. Capital inflow surges can give rise, indeed, to both macroeconomic concerns to which macro policies are the first responders and to financial stability risks for which a different set of policies, macroprudential ones, are the appropriate first responders. It’s important to recall, indeed, that a key lesson from the global financial crisis is that policymakers cannot rely solely on macro policies to address the various shocks they face.

As discussed in our new paper, “Managing Capital Inflows: What Tools to Use,” prudential measures come in many varieties. Some, such as maximum loan-to-value ratios, can be expected to help address financial stability risks associated with inflows surges without normally affecting the volume of inflows themselves. But other prudential measures, particularly related to the currency denomination of the transaction may or may not also affect the volume of capital inflows. An example would be a measure that discourages lending in foreign currency to unhedged domestic borrowers. Depending on circumstances, this could simply transfer the risk from the domestic borrower to the foreign lender while leaving inflows unchanged, just like a standard, nondiscriminatory prudential measure. Or it could wind up discouraging capital inflows, thus mimicking the capital control. This underscores the often blurry lines across different measures and the need for a pragmatic rather than a dogmatic approach in assessing the appropriateness of different tools in particular circumstances.

So, given the economic similarities between prudential and capital control measures, what should guide the use of one set of instruments over the other? Here a distinction needs to be made between flows intermediate and through the regulated financial system and flows that bypass that system. In the former case, prudential tools are likely to be the main instrument and tailored to the specific risks -- currency risk, credit risk, sudden-stop risk, or active price bubbles. When flows bypass the regulated system, expanding the perimeter of regulation is an option. But in the case of direct borrowing from abroad, prudential tools will not have traction and capital controls may be needed to manage the risks that inflow surges bring.

Do these measures work? The evidence we surveyed in our earlier staff policy notes suggest that capital controls have more traction in altering the composition of inflows than the additive volume, though empirical evidence on the latter leaves room for doubt given the econometric problems that plague virtually all the studies.

Altering the composition, of course, without changing the average level, is exactly the outcome policymakers are looking for when they are trying to address financial stability risks rather than macroeconomic risks. The evidence in our new paper is that both prudential measures and capital controls seem often to have been effective in reducing various risks in the economy and ultimately in enhancing the resilience of economies to a global financial shock.

A final issue that I will touch upon relates to the design of capital controls themselves. A first aspect is the temporary versus permanent issue. A popular view is that capital controls make sense only to cope with temporary surges and that the economy should adjust to persistent inflows with a higher exchange rate. We agree with this argument when the purpose of the controls is to address macro concerns. Our paper, however, makes the point that for financial stability reasons, the distinction between transitory and persistent flows is less pertinent. Since the key concern is a surge that might overwhelm the normal regulatory framework, both capital controls and prudential measures can be strengthen to counter the credit cycle, remaining in place until the flows are abated or reversed.

The second issue relates to the breadth of controls. Should they be targeted or broad? Here the purpose of the measures is critical, with broader measures needed to address macro risks and targeted ones for sectoral risks.

A third issue relates to whether the measures should be price based or administrative. Our strong prior as economists is that price-based is best, but it must be recognized that prudential regulation is frequently quantitative because of uncertainties about the responsive banks to a price-based measure, which means that the regulator may seek to cap the risk rather than to price it. This has implications for capital control design. Clearly, when there are macro concerns, only price-based measures make any sense at all, but for norrower risks that involve regulated financial institutions, administrative measures should not be ruled out provided they can be made transparent and rules-based rather than opaque and subject to rent-seeking.

A number of other aspects related to design of the toolkit are in the paper, but I’ll stop here and of course stand ready to address your questions. Thank you.

QUESTIONER: Good morning. Thanks for the call. I have a question on the G20. In January, the French President Nichols Sarkozy was advocating for a code of conduct for capital inflow management measures. Would you say that the nine key elements that you are putting forward are looking like the code of conduct that could be appropriate for the G20?

MR. HUSAIN: Let me try and respond to that. I think what the framework that you’re referring to tries to do is lay out a basis for advising countries on how to manage capital inflows. This may be a first step towards developing a broader code of conduct that the G20 is discussing, which I understand would cover not just recipient countries but also source countries.

QUESTIONER: I’m wondering if there was much controversy within IMF staff or at the Board level on exactly what should be here, and what’s left on the trimming floor or what was left out after Board and internal discussions?

MR. HUSAIN: Sure. So, what was left out I don’t know. I think everything’s in. But more seriously, yes, as with many issues, there was a lot of discussion both at the staff level, at the Board level, and so on. Partly this reflects of course the fact that capital account issues generally exercise a lot of enthusiasm and interest. I think what’s important this time around is that the Board of the IMF has come to a consensus view, and that’s represented quite accurately in the Public Information Notice, in the Board’s view. Now, in it also are elements of where there were sort of variations in that view. But it is a big step forward to actually come out with the institutional view, which this time around we have.

QUESTIONER: So, there was nothing that specific members had wanted included that is not in here, and— I’m sorry, you said “enthusiasm.” So, you’re saying there wasn’t any sort of disagreements or controversy at all?

MR. HUSAIN: Well, look, there’s always discussion, and this time around there was indeed a lot of discussion. The discussion covered a lot of areas. Those are accurately represented in the PIN. I’m not sure if there’s anything specific that you have in mind.

QUESTIONER: No, no, no. If you’re saying that those ideas have been represented, I guess you’re talking about in the PIN where it says they’re a small majority wanted such and such but --

MR. HUSAIN: Indeed.

QUESTIONR: Two short questions: Actually, the PIN is not clear for me, not that clear. I was wondering whether—you said that there was a majority so now it’s endorsed, so now it’s going to be applied in Article IV? Aren’t you concerned that we’re maybe in a situation like the 2007 surveillance agreement where the terms on the exchange rate thatbrought a lot of problems and some terms were later abandoned. Are you not concerned this may be a similar situation.

An older version of this report was mentioning ‘guidelines’ as opposed to ‘framework’, so could you explain what that means in terms of difference in spirit?

MR. HUSAIN: So let me be clear. What this framework will do is provide a basis for the Fund to give policy advice to member countries, and the reason it’s important to have a framework for doing so is to achieve consistency, to achieve evenhandedness, and actually equally importantly to give member countries some sort of predictability or, from perspective, some predictability on what the Fund’s policy advice is going to be. But at the end of the day, what this is is policy advice, and this happens in the context of country missions. This happens in the context of country reports that are prepared and then discussed by the board. And that’s what we will get.

So, that’s very much the idea here. What you see is a framework that underpins this policy advice, but it cannot be, obviously, specific for individual cases. So, when we take up, or when a country team takes up the analysis for a particular country, it will use this framework to come up with the policy advice for that particular country.

QUESTIONER: So, does that mean that starting now you’re going to do the Article VI using this?

MR. HUSAIN: So, capital inflows are not something that have started only today, right? In the past year or more, managing capital flows has been an issue for a number of emerging markets, and what you have seen in country reports for countries ranging from Indonesia to Brazil, South Africa, Turkey—and I’m naming just the ones that are highlighted, in fact some of the ones that are highlighted in this paper. In Article IV reports for these countries, there have been discussions about what is being done to manage capital inflows, what the staff’s views are, and then of course in the Article IV discussion at the Board, the Board takes views on this and that’s represented in the PIN that comes out subsequent to the meeting.

What will be different starting today or going forward will be that this framework will be underpinned and applied consistently, so whereas in the past what you might have seen is some variation, depending on which country now will hopefully have more consistency. But I don’t want to go too far on this. We have not by any means a one-size-fits-all approach. There will be a lot of country-specific color that will have to be sort of understood and incorporated by country teams when they prepare reports.

QUESTIONER: Okay, and just for the fact that it used to be called ‘guideline’ and now it’s called ‘framework’, does it change what it is?

MR. HUSAIN: I can count maybe five or six names that we have given in the process of preparing this paper. What you have now is the consensus that we have. And I think I’ve tried to describe how this will be used. In the end we think that framework nicely captures the use.

If I can, actually, I’d like to come back a little bit to the code of conduct question at the beginning. So, maybe one way to think about this is a framework for policy advice. So, there are no expectations or obligations that arise, which might be what’s understood. And I don’t know if that is necessarily the case. But often people understand code, or code of conduct or maybe other things to mean obligations. That’s not the intent here at all. It is a framework for policy advice.

QUESTIONER: In terms of capital control, what is the IMF’s judgment about the gradual appreciation of some certain currency, just like RMB? I mean, in terms of capital controls, how does IMF judge the effect of the gradual appreciation of some certain currencies, just like the RMB? What’s the effect of this kind of exchange rate policy towards capital control?

MR. HUSAIN: If I understand the question right, you are asking what is the relationship between capital controls and exchange rates and what does the framework have to say about that?

QUESTIONER: …and the gradual appreciation of some currencies.

MR. HUSAIN: So, in terms of specific currencies, especially the RMB, the framework does not go into the specifics. I’m not going to be in a position to comment on specific countries. For the framework more generally, the idea is that capital flow management measures should be used when exchange rates are not undervalued. So, if a currency is undervalued, that would generally mean that capital flow management measures are not appropriate under the framework.

QUESTIONER: I want to come back to just a few issues here. So, the Fund is saying and I think we should just call it what it is, that there’s no doubt that emerging markets are very sensitive about what is going on, and this came out in the Board meeting. They didn’t like the word “guideline,” so therefore you settled on “framework.” So, this has exposed very deep internal divisions that have gone on for a long time.

I was wondering what you would say from the emerging markets point of view that this paper does not address the sources of the capital flows, number one, and number two that in no way did they want this framework to be in any way prescriptive. So, I was wondering how you’ve disposed these sensitivities in this paper.

MR. HUSAIN: So let me start from the end and work backwards. How does the framework, or what does the paper have to say about the other side of the capital flows issue, which is source countries?

So that is, indeed, an issue that the Board believes needs to be addressed, and the paper outlines in sort of a summary form what is the work program of the institution going forward to try and address that.

In the end, having a framework for capital flows has to cover both source and recipient countries. What we’ve got right now is certainly, at best, half the picture, the recipient side, and we need to work on the source side.

Now, work on this is underway. I mentioned in the opening remarks spillover reports which will assess the impact of policies in the major countries, major economies, most of which are the source countries for capital flows, which will effect the impact of policies in those countries, specifically monetary policy, but also other polices, including macro prudential policies, capital flows and cross-border flows. So that will certainly be important in covering the other side of the issue. Now, the concern about whether the framework is prescriptive, I want to be clear on that the framework is not prescriptive in the sense that there are no obligations that arise from the framework that weren’t there to begin with.

As members of the IMF, countries do have obligations, but those don’t change as a result of the framework. The framework is purely for policy advice, so it does not limit the range of options that countries have at their disposal.

Now, on some of your earlier remarks, there is a discussion, and there was a discussion at the Board. There’s a discussion at the staff level, and there is a discussion generally in various forums, including the G20 on capital flows and capital account issues generally.

I don’t think it’s right to say emerging markets versus everybody else, or a certain group is sensitive and other groups are not. There are a range of views. And the big step here is that this range of views has been conversed sufficiently to actually put forward a consensus.

QUESTIONER: Are you seeing in the end a formal framework that will be adopted and endorsed by everybody once everybody is happy with it? Is that what you’re seeing coming out at the end? I mean you said this is the first step, but what is the end part?

MR. HUSAIN: That depends very much on the membership, and, of course, part of the membership is represented also at the G20, but not all of it. So I think it will depend on, you know, what comes out of the other side of the debate, among other things. Also, it will depend on the experience from using this framework as policy advice.

QUESTIONER: I have two quick questions. I just wonder if, in your analysis, you found any countries that are implementing these flow management measures that you consider excessive beyond the pale, distorting in any way, or any that are implementing them when they shouldn’t be? In other words, when they don’t meet the criteria you’ve set out, such as having sufficient or excessive reserves or having an undervalued currency?

MR. HUSAIN: So this is a tough one, but luckily I can actually punt this one to upcoming country reports. We do not try to classify individual countries as you know, whether they are following the framework or not.

What we do try to illustrate in our paper, and I’ll refer you to figures, I believe 8 and – figures 9 and 10, which try to, again, illustrate—and I’ll emphasize the word illustrate here—how many countries might sort of have the appropriate macro economic policies and circumstances in place to actually be using CFMs.

And there we find that it’s actually starting out—we thought it would be very few, but it surprised us that actually a quarter to a third at the time we did these empirical exercises seemed to meet, at least illustratively, these criteria.

QUESTIONER: And are these countries using measures or some of them are not and could?

MR. HUSAIN: In fact, several of them are using those measures, and somewhere we actually do note that. But again, I emphasize that this is an illustrative placement rather than actually going through country by country and trying to asses them against the guidelines. It’s done using sort of cross-country information and so forth. Let me actually turn to my colleague, Reza, I think who might have something to add here.

MR. BAQIR: I just wanted to add that on your question, the reasons we put in these figures were to illustrate what you were trying to get at, which is how many countries might be right now facing economic circumstances where it makes sense to use such measures.

And so if you look at those two figures, the purpose of those figures is to illustrate the distribution of countries. And we thought they used that illustrative exercise to show whether this is something that will be very, very rare right now or something very, very common. And as often said, we come up with using these illustrative criteria, roughly between a quarter to a third of the countries being in the center of the three circles in those figures.

QUESTIONER: I guess what I’m really more wondering about is—obviously capital controls used to be sort of a dirty word, now it’s sort of an accepted policy measure in certain circumstances. But I’m wondering if you’re seeing any worrying trends in misuse of certain kinds of controls either because of the type of control or because of the situation of the economy. So without going into specific countries, are there countries that are using these types of controls that are misusing them based on this criteria, in other words, that don’t meet the criteria and are using controls—rather than policy adjustment that they should be doing?

MR. OSTRY: I don’t think you’re going to get us to talk about specific countries.

QUESTIONER: No, I’m not talking about specific countries—more about your concerns.

MR. OSTRY: Right; where we can be clear is on the criteria. So clearly, if you’re an economy with a massively undervalued currency, reserves that are excessive according to prudential norms, and recognizing that there’s a lot of room for maneuver there, where your fiscal and monetary policies have room to adjust to help abate the inflows, then in those circumstances, either controls, or, indeed, prudential measures that mimic the effects of the controls would rightly be frowned upon.

And in making these assessments of the exchange rate in reserves, you have to look at it from a multilateral perspective.You can’t just say, well, I’d like a lower exchange rate in order to boost my exports.

So I think the papers try and bring clarity to the circumstances in which action by one country would be considered beggar-thy-neighbor or not in the sort of global interest. And I guess you can slot the countries according to those various criteria.

QUESTIONER: But I’m just asking, you’ve said that there’s, according to these figures, there’s quite a surprising number of countries that meet the criteria to be able to implement the controls. Are you concerned about the number of countries that are implementing when they shouldn’t be, is that a worrying trend?

MR. HUSAIN: What we do not try to do, at least not yet in this paper, is try and document how many countries globally have implemented CFMs and whether that’s too many or too few. But just to underscore what Jonathan was saying, and before that, what Reza was saying, that really the reason why it’s important to be even talking about CFMs and thinking about under what circumstances it’s appropriate to use them is precisely for the reasons you mentioned, that a proliferation of CFMs can, indeed, be a problem.

At this stage, we have not sort of gone globally to see how many CFMs exist, how many of those are new and so forth. But the principle that a proliferation could be an issue that would have multilateral effects is certainly a motivation for developing a framework.

MR. OSTRY: Let me just add one thing to that. We need to do some more thinking on the multilateral effects. We are rightly paying lip-service to them, we should pay more than lip-service, we should analyze them. But prima facie, it’s not always clear how these multilateral effects work. For example, if controls are prudential measures that act like them, serve to keep out flows that are inherently particularly risk. Then if such measures proliferate, it’s not clear that this would be damaging, particularly for the global economy.

Likewise, if countries mistakenly invoke measures that keep flows out, that would be inherently beneficial for their economy and those flows go elsewhere. Then those additional flows, good flows, as it were, going to other countries, would be beneficial.

So again, we think we know the multilateral impact, and we tried to identify circumstances under which we think the imposition of these measures could be multilaterally destructive, especially in cases when the currency is undervalued. But we need to do more thinking about exactly how these multilateral effects work.

QUESTIONER: I’d like to have more on the push factors like, can we expect in the near future the IMF releasing a paper on, for example, push factors like the monetary policy in the United States? Is the IMF going to tell the United States that the United States monetary policy has since spilled over to the emerging markets? This is my first question.

The second one is about what happens when a country has a program—you have conditionalities, you have to do some things in these programs. Can you enforce or ask for some measures on capital controls in these programs?

And my last question is about page 58. Your staff says here that the real is overvaluated. I’d like to have more on that, how much is it overevaluated, and how did you find this conclusion?

MR. HUSAIN: So first, is the IMF preparing a paper on push factors, and specifically, will the spillover report for the United States look at the impact of monetary policy of the United States on the rest of the world? So the answer to the latter is, yes, the spillover report will look at the impact not only of U.S. monetary policy, but also of other key macro economic policies taken by the United States, both current as well as possible future policies, and what their spillover impact would be. This will be done as part of the next Article IV of the United States. So the policy implications of those spillovers will be very much part of the policy dialogue in the Article IV. And this applies more broadly to all the big economies, which include the Euro area, China, Japan, and the United Kingdom.

Other work on push factors you will also see, the upcoming World Economic Outlook, I believe this week or next week, as well as the Global Financial Stability Report. Both have discussions of analysis of push factors.

Your second question, what happens, or what is the implication of the framework for programs? There is no formal implication that I am aware of. I guess in programs generally, appropriate program conditionality depends on the appropriate macro circumstances, and if there are macro circumstances that are relevant that are also covered by this framework, I suppose it could also be covered by program conditionality.

Now, if you had a specific question in mind, I’d be happy to try and address that. But let me move to your third question on Brazil. Like I said at the end of my opening remarks, we are not doing individual country assessments here. But as far as an exchange rate assessment for Brazil, we do that in the context of Article IV.

QUESTIONER: I have two questions; the first is, what does this framework really achieve? You said it’s a major step forward, the creation of a consensus, but you then say very clearly that it doesn’t apply to particular countries and it’s not good to be directly involved in Article IV and so forth. So what is it actually going to lead to?

And secondly, listening to the first two presentations, I’m wondering whether there isn’t actually some inconsistency even in this considered consensus since, I guess it was Aasim who spoke first, talked of, what’s the new capital flow measures which should be used after you’ve got the macro policy, right?

And then your second speaker talked about prudential measures which could be used permanently, and he said I think something about there was a debate about temporary versus permanent, and they could be there permanently. So I wonder if there isn’t tension between those two, and if there is, does it reflect the kind of tension within the organizations?

MR. HUSAIN: So first on what does the framework achieve? So I think what the framework achieves is, it gives consistency, or it ensures consistency in our policy advice. I’d like to think that our policy advice was not inconsistent to begin with. But by having a common framework that represents sort of agreement at the Board means that we can then apply this framework to countries in a uniform way. But you picked up on, of course, the point that, of course, country circumstances matter. So the application to individual countries will necessarily have to be adapted to individual countries, and I think that’s right.

But the analytical underpinnings, if you will, for that policy advice hopefully now become consistent, and equally importantly, they become predictable for member countries. They should not be surprised when the Fund comes and says that we think that your macro policies are appropriate, and that you could also consider CFMs at this time. Then the country should not be surprised by that.

Now, I wanted to try and correct what I thought might be a misimpression, that this would not be part of the Article IV. So we do give policy advice in the context of Article IV. When an Article IV consultation is discussed by the Board, the steps are policy advice underpinning the report will be discussed, and the Board will then form a view on its own policy advice, which, again, will be based on this framework.

Let me turn to your second question which is about possible inconsistencies between the two papers that you have before you today. What I’d like to emphasis is, the Board paper draws on a lot of work that is ongoing in the institution, including the work that Jonathan spoke about, as well as work that Jonathan and other colleagues did a year ago, other work that’s going on in the institution, other Board papers that have been prepared, most notably the one late last year on the role of the Fund in cross border flows.

As you heard in what Jonathan had to say, this particular paper that he describes goes a lot further in various areas in looking at the aspects of various types of measures and under what conditions what measures can and should be used, et cetera. That is the cutting edge of where things are. The Board Paper is not as far as the cutting edge at this stage.

One particular point that you picked on, which I think is exactly right, you notice that prudential measures, as Jonathan described them, had a slightly different sort of time aspect to what we have at CFMs, which, in the framework, should be temporary, as long as the capital inflow surge persists. So there I will note that in our nomenclature or our terminology of CFMs, we include some prudential measures, but not all prudential measures. And the prudential measures that are covered by CFMs are those that are designed to affect inflows.

Now, not all prudential measures will be of that variety. Jonathan I think gave some examples of, I believe he used an example of loan-to-value ratios. More generally, I would point you to figure 7 in the Board Paper, which contains a number of recent examples or examples used recently by the seven countries that we look at closely, of prudential measures that are not CFMs.

MR. OSTRY: I don’t have too much to add. I would suggest that maybe people go back and look at the IEO’s report on our approach to capital account liberalization and management of capital inflows, which is dated from 2005. It gives a nice perspective on what is new, what is not new, it’s always good to look a bit at history of how the institution has evolved. It’s on the web, so it’s a good source.

A careful reading of the documents will show some differences, but a lot of similarities. The reason there are differences is that this is a very tough issue, the profession is not settled on it, policy-makers are not settled on it. So you’ve hit on one area where there are some nuances. One of the messages from the crisis, and, indeed, in the Fund’s advice since the Asian crisis has been the importance of safeguarding the domestic financial stability from a variety of shocks, and that has to include the damage that can be brought by (inaudible) cycles in foreign flows.

We emphasize the importance of having a strong prudential framework and even adjusting that framework to cope with the extra froth that can arise when inflows get really high and the normal prudential framework can’t cope. We think this can come at a stage with due regard to the multilateral consequences of this.

Where it ranks in the policy hierarchy also depends on whether the flows are intermediated through the regulated financial system; where they are not, then prudential measures will have–which really only have traction against flows intermediated through the regulated financial system, prudential measures will not have traction, and one may need to resort to capital controls rather earlier. That’s all I would say at this point.

QUESTIONER: You said that there are other papers coming, but I’d like to know what you can say about some critics saying that, to this paper, that you talk a lot of the countries, the recipients of capital flows, but you don’t pay attention to the originated problem, originated capital flows.

MR. HUSAIN: This paper is about recipients, it is not about originators, and that is only part of the picture. And I think the paper tries to acknowledge that both up-front and at various places. Really the completed picture will include work on source countries, and we need to put it all in context once we have it. But the point is that managing inflows is a relevant issue right now, and the Fund is giving policy advice right now, and countries are trying to grapple with managing capital inflows right now. So having a framework is relevant now, and that’s why this step should not have waited for everything else to fall into place to actually be taken.

MS. LOTZE: Thank you very much. So this debate will continue. I thank you very much for coming into the conference call. Thank you very much and goodbye.

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