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Liberalization and Regulation of Capital Flows: Lessons for Emerging Market Economies

Author

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  • Mohan, Rakesh

    (Asian Development Bank Institute)

  • Kapur, Muneesh

    (Asian Development Bank Institute)

Abstract

Capital flows to emerging market economies (EMEs) have been characterized by high volatility since the 1980s. In recent years (especially since 2003), although gross as well as net capital flows to the EMEs have increased, they could not be absorbed domestically. Overall, savings have flowed uphill from EMEs to advanced economies, challenging the conventional view that capital flows to EMEs are always beneficial through augmentation of their resources leading to greater investment. Full capital account liberalization can impart avoidable volatility and have an adverse impact on growth prospects of EMEs. Available evidence is strongly in favor of a calibrated and well-sequenced approach to opening up the capital account and its active management, along with complementary reforms in other sectors. Greater caution is needed in the liberalization of debt flows. Despite much advice to the contrary, most EMEs manage their capital accounts actively to cushion their economies from undue volatility, including interventions in the foreign exchange markets accompanied by sterilization. Sound macroeconomic and financial policies-accompanied by prudent capital account management, greater exchange rate flexibility, purposive use of prudential regulation, and continued financial market development practiced by most Asian EMEs over the past decade-have cushioned their economies from the current global financial crisis that started in 2007. They have successfully achieved a virtuous circle of continuing growth, low and stable inflation, and financial stability. How these elements can be best combined will depend on the country and on the period: There is no "one size fits all." Such a discretionary approach does put a great premium on the skill of policymakers and can run the risk of markets perceiving central bank actions becoming uncomfortably unpredictable. Such risk is mitigated by a record of successful management.

Suggested Citation

  • Mohan, Rakesh & Kapur, Muneesh, 2010. "Liberalization and Regulation of Capital Flows: Lessons for Emerging Market Economies," ADBI Working Papers 186, Asian Development Bank Institute.
  • Handle: RePEc:ris:adbiwp:0186
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    References listed on IDEAS

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    Cited by:

    1. repec:wsi:ceprxx:v:03:y:2014:i:02:n:s1793969014500101 is not listed on IDEAS
    2. Shinji Takagi, 2012. "Monetary and Currency Policy Issues: An Overview," Chapters,in: Monetary and Currency Policy Management in Asia, chapter 1 Edward Elgar Publishing.
    3. repec:taf:rjapxx:v:16:y:2011:i:3:p:294-312 is not listed on IDEAS
    4. Morgan, Peter J. & Lamberte , Mario, 2012. "Strengthening Financial Infrastructure," ADBI Working Papers 345, Asian Development Bank Institute.
    5. Obstfeld, Maurice & Rogoff, Kenneth, 2009. "Global imbalances and the financial crisis: products of common causes," Proceedings, Federal Reserve Bank of San Francisco, issue Oct, pages 131-172.
    6. Lipsky, John, 2009. "Asia, the financial crisis, and global economic governance - closing remarks," Proceedings, Federal Reserve Bank of San Francisco, issue Oct, pages 347-353.

    More about this item

    Keywords

    capital flows emerging markets; liberalization regulation capital flows; emerging markets capital account management; capital flows; emerging market economies;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F30 - International Economics - - International Finance - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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