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Paradigm shift? A critique of the IMF’s new approach to capital controls

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  • Daniela Gabor

    (University of the West of England)

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    Abstract

    The global financial crisis forcefully highlighted the importance of developing mechanisms to curb the effects of large and volatile capital inflows on growth and financial stability in developing countries. It led the IMF to reconsider its long-standing rejection of capital controls. This paper explores the analytical framework underlying the IMF’s new position, arguing that its sequencing strategy offers a formulaic solution that neglects the institutional make-up of money and currency markets, is asymmetric in its emphasis on the upturn of the liquidity cycle and sanctions capital-controls only as a last-resort solution. The new approach can have perverse impacts, increasing vulnerability where banks play an important role in the intermediation of capital inflows. The paper offers alternative policy solutions that focus on realigning bank incentives towards longer horizons and sustainable growth models, combining carefully designed central bank liquidity strategies and institutional changes in the banking sector.

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    File URL: http://carecon.org.uk/DPs/1109.pdf
    File Function: First version, 2011
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    Bibliographic Info

    Paper provided by Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol in its series Working Papers with number 1109.

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    Length: 44 pages
    Date of creation: Jun 2011
    Date of revision:
    Handle: RePEc:uwe:wpaper:1109

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    Keywords: IMF; capital controls; financial crisis; global liquidity; shadow banks; sterilizations; central banks.;

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