Odd Lots Why the IMF Changed Its Views on Capital Controls
Dec 7, 2020
Prakash Loungani and Sriram Balasubramanian from the IMF's Independent Evaluation Office delve into the shifting perspectives on capital controls. They explore how the IMF's stance has evolved in the face of emerging market challenges, especially after financial crises. The duo emphasizes the role of capital controls as tactical tools for stability and examines their impact on local economies and housing affordability. They also discuss the balancing act between globalization benefits and the need for robust policy frameworks.
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IMF's Evolving Stance on Capital Controls
- The IMF initially supported capital controls, influenced by Keynes and Harry Dexter White.
- Later, the IMF shifted towards open capital markets after the fall of the Berlin Wall.
Mechanisms of Capital Controls
- Capital controls can involve discriminatory taxes on short-term investments.
- They aim to encourage longer-term investments over speculative "hot money."
Capital Controls and the Impossible Trinity
- Emerging markets use capital controls to manage foreign capital flows and maintain policy space.
- This helps navigate the "impossible trinity" of exchange rate stability, independent monetary policy, and open capital accounts.