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Regulating Capital Flows at Both Ends

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Regulating Capital Flows at Both Ends

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IMF,

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Have you ever tried drinking from a fire hose? That’s the kind of problem emerging markets face in adjusting to volatile capital flows.

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8

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  • Innovative

Recommendation

Emerging markets must master a difficult balancing act: While they need adequate investment for development, sequential floods and droughts of cash can destabilize their economies when financial waves shift. Attempts to use capital controls to smooth the flow has rendered mixed results, as aspirations have collided with institutional weaknesses in many countries. Is there a better way? getAbstract recommends this scholarly report from Atish R. Ghosh, Mahvash S. Qureshi and Naotaka Sugawara, economists at the International Monetary Fund, for its comprehensive analysis of the efficacy of capital controls and its case for multilateral cooperation in the management of financial flows.

Summary

Nations receiving large, volatile capital inflows are at risk of currency disruptions, overheated economies and financial crises if the flow of money abruptly reverses. Some emerging markets have tried to contain those risks with policies to regulate and restrict cross-border capital flows. Capital exporting countries perceive less risk in outflows, but they can suffer from the economic contagion of recipient nations’ instability. When nations export capital, their stimulative monetary policies can become less effective, potentially requiring stronger, more distortive measures...

About the Authors

Atish R. Ghosh, Mahvash S. Qureshi and Naotaka Sugawara are economists at the International Monetary Fund.

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