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Related articles

World Bank-IMF annual meetings 2010

12 October 2010

Finance

Background

How to manage capital flows?

World Bank Institute debate

12 October 2010 | Minutes

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
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World Bank-IMF annual meetings 2010

12 October 2010

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The Bretton Woods Project is a UK-based NGO that challenges the World Bank and IMF and promotes alternative approaches. We serve as an information provider, watchdog, networker and advocate. Our flagship publications are the Bretton Woods Observer, a quarterly critical review of developments at the World Bank and IMF, the Dispatch, a biannual analysis of the World Bank and IMF Spring and Annual Meetings, and the NewsLens, a bi-weekly roundup of key news and critical viewpoints published about the World Bank and IMF.

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