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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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