Managing Capital Surges

Graham Bird

Published: March 2012

Following the global financial and economic crisis, and beginning in mid-2009, there has been a surge of capital into Asian and Latin American emerging economies. While capital inflows have a good side, they also have a bad side. This will be particularly pertinent when the increase in inflows occurs rapidly and when the flows take the form of relatively short-term and debt-related investments. These have been characteristics of the recent surge. Concerns about exchange rate appreciation and the macroeconomic effects of foreign exchange market intervention, as well as the effects on domestic asset and housing markets, have led countries to introduce capital controls of one form or another. Having favoured a move towards greater capital account liberalisation in the 1990s, the IMF’s attitude to controls has moderated, and it is now trying to establish a framework to guide the use of capital flow management measures. This article analyses the issues involved and discusses the chances of such a framework being effective.

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