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Controlled Capital Account Liberalisation: A Proposal

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  • Raghuram G. Rajan

    ()

  • Eswar S. Prasad

    ()

Abstract

This paper outlines a proposal for a controlled approach to capital account liberalization for economies experiencing large capital inflows. The proposal essentially involves securitizing a portion of capital inflows through closed-end mutual funds that issue shares in domestic currency, use the proceeds to purchase foreign exchange from the central bank and then invest the proceeds abroad. This would eliminate the fiscal costs of sterilizing those inflows, give domestic investors opportunities for international portfolio diversification and stimulate the development of domestic financial markets. More importantly, it would allow central banks to control both the timing and quantity of capital outflows. This proposal could be part of a broader toolkit of measures to liberalize the capital account cautiously when external circumstances are favorable. It is not a substitute for other necessary policies such as strengthening of the domestic financial sector or, in some cases, greater exchange rate flexibility. But it could in fact help create a supportive environment for these essential reforms.

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Bibliographic Info

Paper provided by eSocialSciences in its series Working Papers with number id:278.

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Date of creation: Dec 2005
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Handle: RePEc:ess:wpaper:id:278

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Related research

Keywords: capital account liberalisation; secrutising capital inflows; domestic currency; foreign exchange reserves; closed-end mutual fund; international portfolio diversification; Ecionomics; International Finance; Financial Management; Banking;

References

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  1. Eswar Prasad & Shang-Jin Wei, 2005. "The Chinese Approach to Capital Inflows: Patterns and Possible Explanations," NBER Working Papers 11306, National Bureau of Economic Research, Inc.
  2. Shang-Jin Wei & Eswar Prasad, 2005. "The Chinese Approach to Capital Inflows," IMF Working Papers 05/79, International Monetary Fund.
  3. Alfred Broaddus, Jr. & Marvin Goodfriend, 2001. "What assets should the Federal Reserve buy?," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Win, pages 7-22.
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Cited by:
  1. Moore, Winston, 2010. "Managing the Process of Removing Capital Controls: What Does the Literature Suggest?," MPRA Paper 21584, University Library of Munich, Germany.

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