Controlled Capital Account Liberalisation: A Proposal

Raghuram Rajan and Eswar Prasad

Working Papers from eSocialSciences

Abstract: This paper outlines a proposal for a controlled approach to capital account liberalization for economies experiencing large capital inflows. The proposal essentially involves securitizing a portion of capital inflows through closed-end mutual funds that issue shares in domestic currency, use the proceeds to purchase foreign exchange from the central bank and then invest the proceeds abroad. This would eliminate the fiscal costs of sterilizing those inflows, give domestic investors opportunities for international portfolio diversification and stimulate the development of domestic financial markets. More importantly, it would allow central banks to control both the timing and quantity of capital outflows. This proposal could be part of a broader toolkit of measures to liberalize the capital account cautiously when external circumstances are favorable. It is not a substitute for other necessary policies such as strengthening of the domestic financial sector or, in some cases, greater exchange rate flexibility. But it could in fact help create a supportive environment for these essential reforms.

Keywords: capital account liberalisation; secrutising capital inflows; domestic currency; foreign exchange reserves; closed-end mutual fund; international portfolio diversification; Ecionomics; International Finance; Financial Management; Banking (search for similar items in EconPapers)
Date: 2005-12
Note: Institutional Papers
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Working Paper: Controlled Capital Account Liberalization: A Proposal (2005)
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