Tuesday, February 23, 2010

IMF and Capital Controls

A recent IMF report, FLG reads them so that you don't have to, relaxes the institution's stance toward capital controls, but only slightly. In the IMF's view, captial controls may be justified "if the economy is operating near potential, if the level of reserves is adequate, if the exchange rate is not undervalued, and if the flows are likely to be transitory." That's a lot of "if's."

Plus, the IMF is concerned about the effects on other countries:
Widespread adoption of controls by EMEs [Emerging Market Economies] could exacerbate global imbalances and slow other needed reforms—a critical concern at present, when sustained global recovery hinges on a rebalancing of global demand and the sources of growth in individual countries. In addition, controls imposed by some countries may lead other countries to adopt them also: widespread adoption of controls could have a chilling longer-term impact on financial integration and globalization, with significant output and welfare losses. Multilateral dimensions clearly need to be taken into account in assessing the merits of controls at the individual country level.

Apparently, capital controls have gone from always bad, in the IMFs view, to almost always bad.

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