IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

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

  • Mohan, Rakesh

    (Asian Development Bank Institute)

  • Kapur, Muneesh

    (Asian Development Bank Institute)

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.adbi.org/working-paper/2010/01/14/3434.liberalization.regulation.capital.flows/
File Function: Full text
Download Restriction: no

Paper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 186.

as
in new window

Length: 45 pages
Date of creation: 14 Jan 2010
Date of revision:
Handle: RePEc:ris:adbiwp:0186
Contact details of provider: Postal:
Kasumigaseki Building 8F, 3-2-5, Kasumigaseki, Chiyoda-ku, Tokyo 100-6008, Japan

Phone: (81-3)3593-5500
Fax: (81-3) 3593-5571
Web page: http://www.adbi.org/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Ayhan Kose, M. & Prasad, Eswar S. & Terrones, Marco E., 2009. "Does openness to international financial flows raise productivity growth?," Journal of International Money and Finance, Elsevier, vol. 28(4), pages 554-580, June.
  2. Maurice Obstfeld, 2009. "International Finance and Growth in Developing Countries: What Have We Learned?," NBER Working Papers 14691, National Bureau of Economic Research, Inc.
  3. Peter Blair Henry, 2006. "Capital account liberalization: theory, evidence, and speculation," Working Paper Series 2007-32, Federal Reserve Bank of San Francisco.
  4. M. Ayhan Kose & Eswar Prasad & Kenneth S. Rogoff & Shang-Jin Wei, 2006. "Financial Globalization: A Reappraisal," NBER Working Papers 12484, National Bureau of Economic Research, Inc.
  5. Kose, M. Ayhan & Prasad, Eswar & Taylor, Ashley D., 2009. "Thresholds in the Process of International Financial Integration," IZA Discussion Papers 4133, Institute for the Study of Labor (IZA).
  6. Maurice Obstfeld, 2009. "International Finance and Growth in Developing Countries: What Have We Learned?," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 63-111, April.
  7. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Papers 13882, National Bureau of Economic Research, Inc.
  8. Dani Rodrik & Arvind Subramanian, 2009. "Why Did Financial Globalization Disappoint?," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 112-138, April.
  9. Philippe Aghion & Philippe Bacchetta & Romain Rancière & Kenneth Rogoff, 2009. "Exchange rate volatility and productivity growth: The role of financial development," Post-Print halshs-00754377, HAL.
  10. Eswar S. Prasad & Raghuram G. Rajan & Arvind Subramanian, 2007. "Foreign Capital and Economic Growth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 38(1), pages 153-230.
  11. Rakesh MOHAN, 2008. "The Role of Fiscal and Monetary Policies in Sustaining Growth With Stability in India," Asian Economic Policy Review, Japan Center for Economic Research, vol. 3(2), pages 209-236.
  12. Cardarelli, Roberto & Elekdag, Selim & Kose, M. Ayhan, 2010. "Capital inflows: Macroeconomic implications and policy responses," Economic Systems, Elsevier, vol. 34(4), pages 333-356, December.
  13. Rakesh Mohan, 2008. "The Role of Fiscal and Monetary Policies in Sustaining Growth with Stability in India," Working Papers id:1778, eSocialSciences.
  14. Peter Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Discussion Papers 07-004, Stanford Institute for Economic Policy Research.
  15. Richard N. Cooper, 1999. "Should Capital Controls be Banished?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 89-142.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ris:adbiwp:0186. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marc Benger)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.