19 April 2012

Speakers: Kevin Gallagher, Jose Antonio Ocampo, Stephany Griffiths-Jones
Chair: Kermal Dervis

Presentations:

Kevin Gallagher

• Volatility in cross-border flows second only to eurozone crisis in terms of global financial problems in the last few years; Impacts include de-industrialisation, job risks
• Research: NBER and IMF papers on how less lib means fare better in the crisis
• Developing countries implemented controls in large numbers
• Recommendations:

• 1) Capital account regulations (CARs) can be very helpful
• 2) No IMF code of conduct – too prescriptive
• 3) Role for IMF to identify best practices, design regulations, enforce regulations
• 4) More work needed in source countries
• 5) IMF review proliferation of trade and investment treaties that constrain CARs

Jose Antonio Ocampo

• Capital flows very pro-cyclical, make countercyclical policy very difficult, CARs can give room for manoeuvre, some agreement with the IMF on this.
• G20 Cannes guidelines are much better that the IMF framework
• IMF says CARs are “a last resort”, we think they must be part of the package from the beginning
• Need different interventions based on historical level of cap acct liberalisation; IMF is against quantitative based regulations; but in some cases with think quant is better than qualitative
• Should not forget that outflow controls can be useful
• Interventions must be dynamic in order to close loopholes and stop evasion; need a good admin capacity; quantitative CARs are easier to administer (even IMF agreed back in 2000)
• Currency based or residency based? But the tension is not important in practice because they are highly correlated, use them together with macro-prudential regulation

Stephany Griffiths-Jones

• IMF/FSB could play a role in reducing the stigma of CARs; remember the IMF was set up to policy a system of closed capital accounts
• Lots of discussion of domestic financial regulation – but not enough regulation on cross-border flows
• Remember EU debt crisis is essentially a problem of volatile capital flows – intra-EU lending and then reversal
• Capital flows are a strong market imperfection, and CARs can correct the distortion of flows
• Need controls at both ends – recipient and source country CARs; win-win effect: lower the tsunami, and boost the domestic effectiveness of QE and LTRO etc
• Source countries could tax carry trade, spot and derivatives on emerging countries; Brazilians can tax derivatives inflows, so US could do it as well; need to do real flows and purely financial flows (derivatives)
• Taxation as a mechanism gives better enforcement possibilities

Discussion

Kermal – how would a CAL advocate put their argument? Relationship to ex-rate regime

Kevin

• IMF has changed tune, though we quibble with their order of operations; opponents are in the financial services industry
• Traditional arguments against– ineffective and circumvention; this is why you need dynamism in the regulations
• CARs are not as good as macro-prudential or other policy measures? But in developing countries don’t have that luxury often, and the right other policy can spur inflow

JAO

• At base the concern is that market produces wrong exchange rate
• Appreciation leads to accumulation of large current acct deficits, this is risky
• Long-term competitiveness impacts of x-rate change are not symmetrical – lumpy, destruction of physical capital, business organisation
• Countries are more reluctant for CARs versus using foreign exchange intervention (accumulation of reserves), but reserves are costly; fx-interventions might even spur more inflows with CARs
• Targeting the real exchange-rate is the right regime, but don’t announce the targets – do it implicitly

Stephany

• Arguments on “efficienct markets” are getting weaker, clearly the market imperfections are large and govt intervention may be less imperfect
• Institutional arrangements that prevent CARs – EU, OECD, FTAs, WTO
• Power of financial lobbyists is a big problem – endangers their profits

Kermal – compatibility of real exchange target with an inflation targeting (IT) model?

JAO – pure IT is wrong anyway and not compatible; you need multiple targeting with multiple instruments, including x-rate targets; need more instruments than objectives

Karen Hudes – asymmetry on access to information on magnitude on sources and destinations of flows? Do citizens

Peter – fear of protectionism? And how to solve trust problem at IMF?

Georgetown – wedge between professional staff and management at IMF? On x-rate is that only concern or is it also a liquidity control issue? Dutch disease through two channels?

Stephany

• On information – deregulation went too far, ie Bank of England says we don’t need data; precondition is good data; society needs to understand and then regulate; need to fight financial interest groups on secrecy
• On financial protectionism – Bhagwati position is interesting: you are committed to free trade flows then CARs are useful to facilitate free trade, support the market

JAO

• Need good information and data, ie Peurto Rico has errors & omissions more than 10% of GDP; with modern technology you can get lots of info; If you don’t want to regulate, you want to know the information
• QE is not the problem as such, it is the low interest rates and structural difference, so need to manage this in the long run

Kevin

• Market participants could also benefit from more information as well
• IMF EDs should listen to more economists and IMF staff, markets are inherently instable, so CARs are financial correctionism (Piguvian tax)
• Staff and developing country EDs together – US ED is a problem

ECB staff

• Externalities – flows go elsewhere with CARs; strong case for coordination
• Think of China and India – would world be better off if China& India liberalised to release pressure of flows?

Tim Wise, GDAE

• How are new trade agreements going to deal with new world of financial regulation development in emerging markets?

University of California academic

• Return to a new Bretton Woods system with fixed exchange rates? What would this mean?
• Domestic financial deepening? What do you think about this as a measure to dealing with inflows

JAO

• Fixed rate system would be impossible now, look at EU crisis – shows how this is a problem
• Target zones are a better system for post-Bretton Woods
• Yes, we need coordination to deal with externalities, target zones can help with this; some minimal rules for intervention should be useful – ie everyone to have a reserve requirement; everyone to manage currency mismatch risks; but you need CARs to be considered normal business

Kevin:

• we encourage cooperation, we countries to work together
• Need to be very careful on CAL in China and India – huge crisis risks

Stephany:

• Look at Spain, good fiscal policy but big current account deficit; capital flows are a key element of EU crisis; Currency mismatch is key as well esp Eastern Europe
• How do you coordinate? Even national regulations need international coordination
• Developing countries do not trust IMF to be a monitor, need more ad hoc coordination
• Be very careful on China and India – their stability is very important; world citizens have a strong interest in China not liberalising too fast

Jerry Norse, Hudson Institute

• What about different kinds of capital flows? Should you regulate all different types?

Questioner?

• Difference between tax on derivatives on currency versus location of derivatives? Doesn’t it need to be global?

JAO

• Sheri’s chapter on circumvention incl on derivatives, on-shore versus off-shore markets are big test
• You can never regulate off-shore, but you can cut the link between the two; in fact difference in on and off shore mkt shows effectiveness of CARs
• Third country support/cooperation in enforcement is key to tackle some off-shore; US wants cooperation on illicit flows, they should cooperate on this as well.

Stephany

• Cost of evasion is very important; 40% of UK stamp duty paid by foreigners; a lot of transactions being pushed onto exchanges through clearinghouses, so easier to identify and tax these flows
• Markets are human constructs not something impossible to control, if we have cooperation