Global Capital Flows in Spotlight at Brazil Conference

Multibillion-dollar flows can potentially make countries vulnerable

Rio conference looks at ways to manage capital flows, maintain stability

IMF listening to countries' views, considering best policy responses

Min Zhu, Special Advisor to the IMF’s Managing Director, said in opening remarks at the May 26 event that countries had a variety of policy options and tools to manage capital flows that can sometimes amount to billions of dollars a year.

The IMF started reexamining these issues soon after flows to emerging market economies began to rebound from the global crisis, preparing research and analysis that looked in detail at how to use the policy toolkit available to countries, including capital controls. This provided the analytical backing to a framework that was discussed with member countries earlier this year and that will guide IMF policy advice in this area.

Overall, the basic ideas are grounded in key principles: policy interventions should be as closely aligned to the problem at hand as possible, and each country needs to take into account the spillovers and multilateral consequences of its actions.

Macro first

In order to reap the benefits of capital inflows, Min Zhu encouraged countries to first focus on macroeconomic policy and structural measures that improve the functioning and resilience of financial sectors, and thereby help to mitigate the macro and financial-stability risks that surges in inflows may bring.

• Allowing the exchange rate to appreciate unless it is overvalued and/or external stability is at risk;

• Accumulating reserves in line with country insurance metrics;

• Adjusting the monetary/fiscal policy mix by tightening fiscal policy to maintain a sustainable pace of demand growth and, if conditions permit, lowering policy interest rates; and

• Strengthening the macroprudential framework to ensure that financial-stability risks are contained.

Blessing or curse?

The conference was opened over lunch by Brazil’s Finance Minister, Guido Mantega. Brazil’s central bank governor, Alexandre Tombini, and the IMF’s Min Zhu provided introductory remarks before delegates examined the causes of the recent wave of inflows to emerging markets in the wake of the global economic crisis, and whether they are a blessing or a curse. Policy responses to capital inflows were discussed as were regional perspectives on these issues.

Capital flows to emerging markets rebounded after a sharp decline during the global...