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Opening Up to Inequity
Article

Opening Up to Inequity

Davide Furceri and Prakash Loungani
Finance & Development Magazine, 2016
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Editorial Rating

9

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  • Innovative

Recommendation

Policy makers have struggled with the issue of capital account convertibility for generations. In the past, the International Monetary Fund treated the economic growth benefits of free capital flows as an act of faith. But by 2012, the IMF’s understanding of the subject had become far more nuanced. It continues to advocate convertibility, yet it acknowledges that governments need to consider the downsides. In this informative research report, IMF economists Davide Furceri and Prakash Loungani explain why convertibility can worsen financial volatility and income distribution, and they offer cautionary counsel on how governments can lessen the adverse effects of capital mobility. getAbstract recommends this concise but well-argued article to policy makers, central bankers and investors.

Summary

In theory, countries stand to gain from the free cross-border movement of capital. In the past, the International Monetary Fund promoted capital account convertibility to boost economic growth. For instance, at its October 1997 annual meeting, a senior IMF official called liberalization “an inevitable step on the path of development which cannot be avoided and should be embraced.” However, in practice, the unrestricted movement of money can increase income inequality and financial instability.

Economists have long studied the effect of trade on the distribution...

About the Authors

Davide Furceri is an economist at the International Monetary Fund, where Prakash Loungani is a division chief.

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