IMF Develops Framework to Manage Capital Inflows

IMF looks at country experience with capital inflows, policy responses

Develops conceptual framework to weigh different measures

Open to use of capital controls in appropriate circumstances

The framework helps countries

• Weigh the benefits of different policy responses on their economies.

• Choose from a menu of policy options to respond to capital inflows.

• Determine the appropriate circumstances to consider taxes, certain prudential measures, and capital controls, which together comprise “capital flow management” measures.

This latest research is part of work begun over a year ago, and now endorsed by the IMF’s Executive Board, to develop a pragmatic, experience-based approach to help countries manage large capital inflows. Until last year, capital controls were not seen as part of the policy toolkit, now they are.

The Fund released two studies this week: Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy Framework, which looks at country cases and suggests a framework of measures available to manage inflows, including macroeconomic policies, tax and prudential measures, and capital controls. The second paper, Managing Capital Inflows: What Tools to Use, provides analytical underpinning to the Fund’s research on the topic.

This work on capital flows is part of a broader work agenda to enhance the coverage, candor, and evenhandedness of IMF policy advice. In the process, the organization is looking at ways to strengthen how it evaluates advanced economies, where the global crisis began.

The IMF is studying the originators of capital flows, known as the “push” forces. Reports on the effects that policies in one country or group of countries might have on others, known as spillovers, are being prepared for the world’s five largest systemic economies—China, the euro area, Japan, the United Kingdom, and the United States.

Choices, choices, choices

While capital flows are generally beneficial for receiving countries, surges in inflows carry risks for their economies and financial systems. IMF research finds that policy responses to inflows have varied considerably, in part because of the differences between countries and the nature of the capital inflows in each case.

Surges in inflows can pose challenges such as rapid currency appreciation and a buildup in financial sector fragilities, such as those stemming from asset price bubbles or rapid credit growth, or the risk of a sudden stop or...