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This volume contains country experiences explained by policy makers and studies by leading experts on causes and consequences of capital flows as well as policies to control these flows. It addresses portfolio flow issues central to open economies, especially emerging markets.





Currency flows have always been a leading policy concern, especially in emerging markets. The long Japanese slump, the ensuing very low interest rates in Japan that have lasted 20 years, and the carry trades this fostered made currency flows a hot topic again, even before the global financial crisis increased liquidity in all developed economies and led to a new wave of currency flows to emerging market economies.

Joseph E. Stiglitz, Refet S. Gürkaynak

Country Experiences


1.1. Peru’s Recent Experience in Managing Capital Flows

This paper highlights the role played by the buildup of international liquidity buffers and the introduction of preventive measures aimed at reducing financial vulnerabilities during capital surges as key elements of Peru’s recent experience in managing capital flows. It shows how the emphasis of monetary policy on minimizing risks associated with financial dollarization and the improvement in fiscal policy has further contributed to the effectiveness of the policy response against capital reversal episodes, such as in the wake of the collapse of Lehman Brothers.

Paul B. Castillo

1.2. The Turkish Approach to Capital Flow Volatility

The shock waves of the 2008–2009 global financial crisis and the 2011–2012 Eurozone debt crisis hit emerging markets from the trade, finance and expectations channels. We focus on the finance channel in this chapter. We first discuss the challenges arising from capital flow volatility in emerging economies in general. We then focus on the Turkish approach and describe in detail the new policy mix implemented by the Central Bank of the Republic of Turkey during the 2008–2012 period and the results obtained. This approach differs from others in its emphasis on the use of macroprudential policy measures rather than capital flow measures for improving domestic financial stability in the face of volatile capital flows.

Yasin Akçelik, Erdem Başçι, Ergun Ermişoğlu, Arif Oduncu

Recent Trends in Currency Flows


2.1. The Liberalization of Capital Account in China: Retrospect and Prospect

As the result of the increasing integration into global financial market, China has been facing larger and more volatile international capital flows. Chinese government adopted a gradual and cautious strategy to liberalize its capital account, which was reflected not only in the transition of regulating emphasis on capital inflow or outflow, but also in the sequencing for liberalization of different types of capital flows. There is a hot debate in China now about whether Chinese government should speed up the capital account opening, and we argue against this idea for several reasons. The further liberalization of Chinese capital account should follow an appropriate sequencing. Price-based tools should replace the traditional quantitative methods. The capital control should be used along with macroeconomic policies and macro prudential regulations. Chinese government should take an active part in the multilateral co-operations to manage global capital flows.

Ming Zhang

2.2. Appropriate Policy Tools to Manage Capital Flow Externalities

Central banks are at the forefront of cyclical policymaking. They therefore become natural candidates to take over all cyclical policy objectives. This is often the case in policies for controlling capital inflows. Giving the duty of controlling capital flows to central banks, explicitly or implicitly, without giving them the appropriate policy tools, leads to inefficient outcomes. It is clear that when a central bank has to use its interest rate tool to satisfy multiple objectives, it will have to make sacrifices. More subtly, but perhaps more importantly, when central banks incur the cost of capital inflows, mostly in terms of taking the public blame, other policymakers often engage in policies that have the side effect of increasing these flows. It then becomes doubly important to give the capital flow management mandate to the policymaker who fosters the inflows, so their possible negative effects will be internalized.

Refet S. Gürkaynak

2.3. Navigating Capital Flows in Brazil and Chile

In the wake of the global financial crises, Brazil and Chile each attempted to mitigate the negative impacts of a surge in capital inflows into their economies. Brazil deployed a range of capital account regulations, Chile intervened in currency markets. In this chapter, we examine the effectiveness and impacts of these measures.

Brittany A. Baumann, Kevin P. Gallagher

Effects and Multilateral Aspects of Currency Flows


3.1. Monetary Policy in a Multi-Polar World

This paper focuses on monetary policy in the context of a global economy with two or more large countries. It attempts to deal with several questions raised by the domestic ineffectiveness and unintended global results of the United States’ policy of quantitative easing. Our analysis shows that in a world of truly free capital mobility, the effects of monetary policy may be different — typically weaker — than in a closed economy. Restrictions on free capital may therefore be advantageous.

Joseph E. Stiglitz

3.2. Managing Capital Flows — Capital Controls and Foreign Exchange Intervention

This chapter looks at the role of capital controls and foreign exchange market intervention within the policy toolkit for managing boom-bust cycles in capital flows. It considers the role of policies at the country level as well as the spillovers from those policies and the possible need for multilateral coordination. It argues that both types of policy have an important role to play, but that neither should substitute for warranted external adjustment nor be used to sustain misaligned currency values. Spillovers from the use of such policies are likely, but are not an argument against their use, per se. Nevertheless, when policy interventions themselves carry costs, coordination is likely to enhance global economic welfare, and may well need to include both source and recipient countries.

Jonathan D. Ostry


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