Capital flows, like motor cars, may need some rules - IMF paper
WASHINGTON, Sept 7
WASHINGTON, Sept 7 (Reuters) - International capital flows, like motor cars, may need rules of the road to reduce the risk of one country's policy crashing into another's, according to an International Monetary Fund staff discussion paper released on Friday.
"Much like motor cars that bring innumerable benefits, but also more than one million traffic-related deaths each year, cross-border capital flows may need some rules of the road to ensure smooth functioning and operation," the paper said.
The staff note, entitled "Multilateral Aspects of Managing the Capital Account," is part of the IMF's ongoing work to articulate a potential institutional view on capital flows, and is not meant to prejudge the outcome of those efforts.
Jonathan Ostry, deputy director of the IMF's research department, said countries should not use capital controls to prevent external adjustments, particularly when the intent of the controls is to keep a c o u ntry's currency undervalued, because that imposes costs on others in the system.
On the other hand, countries should not worry as much about whether their capital controls will deflect capital to other countries since the appropriate response for those countries would be to impose their own controls, he said.
But there could be a case for coordination among countries when there is a sizeable economic cost, such as discouraging new investment.
"All countries may be able to manage the risks from inflow surges at a lower cost, if they set lower controls than they would choose acting on they own," Ostry said.
It could be even more important for source countries to coordinate policy actions with others, he said.
In the case of the United States, economic data does not seem to indicate that the Federal Reserve's quantitative easing programs to stimulate the U.S. economy had much effect on asset booms or inflow booms in emerging market countries, he said.
But there is long-term historical evidence that interest rates in large countries such as the United States "are an important driver of capital flows," Ostry said.
Low U.S. interest rates encourage the purchase of riskier foreign assets offering greater returns.
So, the Fed should consider the impact that its interest rate policy decisions will have on other countries, Ostry said.