The new IMF approach to capital account management and its blind spots: lessons from Brazil and South Korea |
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Authors: | Barbara Fritz Daniela Prates |
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Institution: | 1. Institute for Latin American Studies, Freie Universit?t Berlin, Berlin, GermanyBarbara.Fritz@fu-berlin.de;3. Instituto de Economia, Universidade de Campinas, Campinas, Brazil |
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Abstract: | As emerging economies experience a boom in capital inflows, governments are increasingly concerned about their downsides. Even the IMF (International Monetary Fund), long a stalwart proponent of financial liberalization, has engaged in a new debate on capital flow management. Drawing lessons from empirical case studies on Brazil and South Korea, this paper finds that the new IMF framework remains insufficient in two main aspects. First, by defining ‘capital flow management measures’ (CFMs) as a temporary instrument embedded in an overall strategy of financial opening, the organization insists on the general advantages of financial liberalization, which poses serious limits to emerging economies’ policy space. Second, the Fund keeps on stressing a separation of prudential financial regulation, which should be permanent, and temporary CFMs. Yet, the case studies presented here show that, especially for emerging markets with rather open and sophisticated domestic financial markets, both types of measures are interdependent and overlapping. Additionally, we demonstrate the relevance of a third type of regulation, lying on foreign exchange (FX) derivatives instruments, which may also be required to effectively manage foreign investors’ portfolio reallocations and their impact. |
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Keywords: | financial markets and the macroeconomy policy objectives policy designs and consistency policy coordination current account adjustment short-term capital movements government policy and regulation |
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