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The new IMF approach to capital account management and its blind spots: lessons from Brazil and South Korea

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  • Barbara Fritz
  • Daniela Prates

Abstract

As emerging economies experience a boom in capital inflows, governments are increasingly concerned about their downsides. Even the IMF (International Monetary Fund), long a stalwart proponent of financial liberalization, has engaged in a new debate on capital flow management. Drawing lessons from empirical case studies on Brazil and South Korea, this paper finds that the new IMF framework remains insufficient in two main aspects. First, by defining 'capital flow management measures' (CFMs) as a temporary instrument embedded in an overall strategy of financial opening, the organization insists on the general advantages of financial liberalization, which poses serious limits to emerging economies' policy space. Second, the Fund keeps on stressing a separation of prudential financial regulation, which should be permanent, and temporary CFMs. Yet, the case studies presented here show that, especially for emerging markets with rather open and sophisticated domestic financial markets, both types of measures are interdependent and overlapping. Additionally, we demonstrate the relevance of a third type of regulation, lying on foreign exchange (FX) derivatives instruments, which may also be required to effectively manage foreign investors' portfolio reallocations and their impact.

Suggested Citation

  • Barbara Fritz & Daniela Prates, 2014. "The new IMF approach to capital account management and its blind spots: lessons from Brazil and South Korea," International Review of Applied Economics, Taylor & Francis Journals, vol. 28(2), pages 210-239, March.
  • Handle: RePEc:taf:irapec:v:28:y:2014:i:2:p:210-239
    DOI: 10.1080/02692171.2013.858668
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    References listed on IDEAS

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    1. John Williamson, 2005. "Curbing the Boom-Bust Cycle: Stabilizing Capital Flows to Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa75, September.
    2. Otaviano Canuto & Danny M. Leipziger, 2012. "Ascent after Decline : Regrowing Global Economies after the Great Recession," World Bank Publications, The World Bank, number 2233.
    3. Otaviano Canuto & Marcelo Giugale, 2010. "The Day After Tomorrow : A Handbook on the Future of Economic Policy in the Developing World," World Bank Publications, The World Bank, number 2507.
    4. Juan Antonio Montecino & Jose Antonio Cordero, 2010. "Capital Controls and Monetary Policy in Developing Countries," CEPR Reports and Issue Briefs 2010-10, Center for Economic and Policy Research (CEPR).
    5. Olivier Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 199-215, September.
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    Citations

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    Cited by:

    1. Chris Garbers & Guangling Liu, 2017. "Macroprudential policy and foreign interest rate shocks: A comparison of different instruments and regulatory regimes," Working Papers 15/2017, Stellenbosch University, Department of Economics.
    2. repec:eee:reveco:v:58:y:2018:i:c:p:683-698 is not listed on IDEAS
    3. Prates, Daniela Magalhães & Fritz, Barbara, 2016. "Beyond capital controls: regulation of foreign currency derivatives markets in the Republic of Korea and Brazil after the global financial crisis," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    4. Daniela Magalhães Prates & Luiz Fernanda De Paula & Barbara Fritz, 2016. "Keynes At The Periphery: Currency Hierarchy And Challenges For Economic Policy In Emerging Economies," Anais do XLII Encontro Nacional de Economia [Proceedings of the 42nd Brazilian Economics Meeting] 110, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    5. Chris Garbers & Guangling Liu, 2017. "Flow specific capital controls for emerging markets," Working Papers 12/2017, Stellenbosch University, Department of Economics.

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