IMF Officially Endorses Capital Controls in Reversal

From Bloomberg
By Sandrine Rastello
December 3, 2012

The International Monetary Fund endorsed nations’ use of capital controls in certain circumstances, making official a shift, which has been in the works for three years, that will guide the fund’s advice.

In a reversal of its historic support for unrestricted flows of money across borders, the Washington-based IMF said controls can be useful when countries have little room for economic policies such as lowering interest rates or when surging capital inflows threaten financial stability. Still, it said the measures should be targeted, temporary and not discriminate between residents and non-residents…

No substitution

The guidelines are “not set in stone” and will be reviewed and updated in the light of new experience and research, Vivek Arora, an assistant director in the IMF’s strategy, policy and review department, told reporters on a conference call today.

The report cautions countries against substituting capital controls for policies it says are needed first, such as currency appreciation or the buildup of foreign reserves. It also says capital controls are rarely sufficient on their own.

While the new guidelines represent a “major step forward” from the 1990s, the range of circumstances deemed acceptable for using capital controls is too narrow, said Kevin Gallagher, an associate professor of international relations at Boston University.

That makes it difficult for countries to fall into the right category, he said.

“It could have a chilling effect on countries’ ability to put in place regulations,” Gallagher said in a phone interview. “It will be tacitly endorsed by a lot of central banks and it will have an impact.”

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