World Bank/IMF Programme of Seminars
7 October 2010

Chair: Manny Zinton-Bedoes (Economist)
Speakers: Malcolm Knight, Anne Krueger, Hyun Song Shin, YV Reddy, Guillermo Calvo

Key points from the discussion

• Reasons for need of capital management – macroeconomic (exchange rate) and prudential (regulatory); a discussion of “capital controls” is outmoded – this is more about prudential regulation to prevent surges and stops
• Capital account management should operate in a counter-cyclical manner, the leveraging and deleveraging cycle is a very important indicator
• A key question is ask is if the exchange and capital markets are orderly or disorderly – no market is perfect they have bubbles and herding – but a determination of disorderly is in the end a judgement call; this what policy makers are there to do, make judgements, just like pricking asset bubbles
• Need different rules for “systemically important” countries – ie reserve issuers, financial centres – not a simple question of a single country that is a problem
• Different kinds of management techniques – price-based measures and administrative measures; price-based measures are better but you may need a combination of the two
• Any prudential measures on the capital account need to work together with fiscal and monetary policy – no single tool is a silver bullet

Points from individual speakers

YV Reddy  

• We cannot know what is “orderly” but we can easily see what is “disorderly”
• Need consistent use of instruments and tools – capital account management – so that macro, regulatory and fiscal and monetary tools are all working together
• Large imbalances are not good for anyone; need to look at “significant spillovers” on international economies
• Need to be careful about international rules; if we took this 10 years ago we would all have regulatory failure like US!
• Globally active financial institutions are the key ones to look at – cross-border financial institutions operating through tax havens are key

Malcolm Knight

• Big global banks are de-risking and de-leveraging; so positions are coming from shadow banking sector, a mixtures of leveraged institutions and non-leveraged institutions working together
• Well-managed countries built up reserves over time, this is appropriate to some degree
• Basel committee proposed a “net stable funding ratio” for banks – we should think of something like this for countries – this is a “prudential control”

Hyun-Song Shin

• Capital flows are very complicated for a country like Korea, can’t have domestic monetary policy; look at the exchange rates in Korea, appreciation has happened (10%) so there is adjustment, but it should be orderly
• If each country can have prudential policies – then that minimises spill-over effects; helps your neighbour; G20 process is key – reform of regulation, macro-prudential tools, resolution and supervision
• Raising interest rates can be very problematic, EMEs don’t follow the Taylor Rule, need some room for autonomous monetary policy by macro-prudential tools; we are a bit in uncharted waters about effectiveness of new kind of controls
• Can’t try to stop the tide; but can work on preventing build up of vulnerabilities, not just stopping appreciation of the exchange rate; Composition and maturity of

Guillermo Calvo

• Probability of sudden stops is correlated with amount of domestic liabilities in foreign currencies, high current account deficits; high foreign liabilities
• Capital controls are not really a way to solve current account deficits; can only effect maturities

Anne Krueger

• Definition of ‘disorderly’ is a problem, since policy makers will more frequently blame markets rather than own policies
• To resist inflows is not the same as beggar-thy-neighbour to some degree; Emerging markets are caught between China-US global imbalances; they are getting side-swiped by the deficits and surpluses