Paradigm shift? A critique of the IMF’s new approach to capital controls

Daniela Gabor
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Daniela Gabor: University of the West of England

No 1109, Working Papers from Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol

Abstract: The global financial crisis forcefully highlighted the importance of developing mechanisms to curb the effects of large and volatile capital inflows on growth and financial stability in developing countries. It led the IMF to reconsider its long-standing rejection of capital controls. This paper explores the analytical framework underlying the IMF’s new position, arguing that its sequencing strategy offers a formulaic solution that neglects the institutional make-up of money and currency markets, is asymmetric in its emphasis on the upturn of the liquidity cycle and sanctions capital-controls only as a last-resort solution. The new approach can have perverse impacts, increasing vulnerability where banks play an important role in the intermediation of capital inflows. The paper offers alternative policy solutions that focus on realigning bank incentives towards longer horizons and sustainable growth models, combining carefully designed central bank liquidity strategies and institutional changes in the banking sector.

Keywords: IMF; capital controls; financial crisis; global liquidity; shadow banks; sterilizations; central banks. (search for similar items in EconPapers)
JEL-codes: E58 E63 F3 G1 O11 O2 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2011-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-mon and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:uwe:wpaper:1109

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