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Controlled Capital Account Liberalization

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Author Info

  • Eswar Prasad
  • Raghuram Rajan

Abstract

In this paper, we develop 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 International Monetary Fund in its series IMF Policy Discussion Papers with number 05/7.

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Length: 17
Date of creation: 01 Oct 2005
Date of revision:
Handle: RePEc:imf:imfpdp:05/7

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Keywords: Capital inflows; Foreign exchange reserves; Capital account liberalization; Capital controls; central bank; domestic investors; capital outflows; domestic currency; capital account convertibility; current account; domestic financial markets; capital accounts; public debt; reserve accumulation; foreign capital; securities markets; private investors; capital markets; capital exports; current account deficits; current account deficit; securitization; foreign securities; repayments; liquid capital; central banks; reserve holdings; foreign bonds; reserve bank; excess demand; government bailout; private capital; domestic investor; principal repayments; debt management; capital account opening; domestic securities; government securities; current account surpluses; external shocks; government bonds;

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References

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  1. Shang-Jin Wei & Eswar Prasad, 2005. "The Chinese Approach to Capital Inflows," IMF Working Papers 05/79, International Monetary Fund.
  2. Alfred Broaddus, Jr. & Marvin Goodfriend, 2001. "What assets should the Federal Reserve buy?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 7-22.
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Citations

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Cited by:
  1. Lane, Philip R. & Schmukler, Sergio, 2006. "The International Financial Integration of China and India," CEPR Discussion Papers 5852, C.E.P.R. Discussion Papers.
  2. Robert Lafrance, 2008. "China's Exchange Rate Policy: A Survey of the Literature," Discussion Papers 08-5, Bank of Canada.
  3. Prasad, Eswar & Rajan, Raghuram G., 2008. "A Pragmatic Approach to Capital Account Liberalization," IZA Discussion Papers 3475, Institute for the Study of Labor (IZA).
  4. Dani Rodrik, 2006. "The Social Cost of Foreign Exchange Reserves," NBER Working Papers 11952, National Bureau of Economic Research, Inc.
  5. Eswar Prasad & Raghuram G. Rajan & Arvind Subramanian, 2006. "Patterns of international capital flows and their implications for economic development," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 119-158.
  6. Mendoza, Ronald U., 2010. "Was the Asian crisis a wake-up call?: Foreign reserves as self-protection," Journal of Asian Economics, Elsevier, vol. 21(1), pages 1-19, February.
  7. Raghuram Rajan, 2008. "Global Imbalances or why are the Poor Financing the Rich?," De Economist, Springer, vol. 156(1), pages 3-24, March.
  8. Olivier Blanchard & Francesco Giavazzi, 2006. "Rebalancing Growth in China: A Three-Handed Approach," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 14(4), pages 1-20.
  9. L. Alan Winters & Shahid Yusuf, 2007. "Dancing with the Giants: China, India, and the Global Economy," World Bank Publications, The World Bank, number 6632, October.
  10. Philip Lane & Sergio Schmukler, 2007. "The Evolving Role of China and India in the Global Financial System," Open Economies Review, Springer, vol. 18(4), pages 499-520, September.
  11. Indermit Gill & Yukon Huang & Homi Kharas, 2007. "East Asian Visions : Perspectives on Economic Development," World Bank Publications, The World Bank, number 6627, October.

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