Coping with Capital Inflow Surges: Reviewing the IMF’s New ‘Institutional View’

Abstract

This paper reviews the IMF’s recently published ‘institutional view’ on capital flows management, focusing on its views on the management of capital inflow surges. The IMF’s acceptance of the use of capital controls and other capital flow management measures (CFMs) in certain circumstances, is a step forward. However, we argue that the IMF’s recommendations as to when CFMs may be legitimately used are difficult to apply in practice, as it is difficult to ascertain whether the conditions that the IMF prescribes are fulfilled, such as whether exchange rates are overvalued. Moreover, the premise that macroeconomic and other measures should be preferred over CFMs, and that any CFMs should therefore be temporary, targeted and transparent, are unduly restrictive. We argue that CFMs could be particularly useful and appropriate in a financial environment where global push factors rather than country specific factors tend to be the dominant drivers of capital flows, and that CFMs should be considered as a potentially useful policy in the toolkit, on par with other policy measures.