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Exchange Rate Management and Crisis Susceptibility
This paper revisits the bipolar prescription for exchange rate regime choice and asks two questions: are the poles of hard pegs and pure floats still safer than the middle? And where to draw the line between safe floats and risky intermediate regimes? Our findings, based on a sample of 50 EMEs over 1980-2011, show that macroeconomic and financial vulnerabilities are significantly greater under less flexible intermediate regimes—including hard pegs—as compared to floats. While not especially susceptible to banking or currency crises, hard pegs are significantly more prone to growth collapses, suggesting that the security of the hard end of the prescription is largely illusory. Intermediate regimes as a class are the most susceptible to crises, but “managed floats”—a subclass within such regimes—behave much more like pure floats, with significantly lower risks and fewer crises. “Managed floating,” however, is a nebulous concept; a characterization of more crisis prone regimes suggests no simple dividing line between safe floats and risky intermediate regimes.
Managing the Tide
This paper examines whether—and how—emerging market economies (EMEs) respond to capital flows to mitigate their untoward consequences. Based on a sample of about 50 EMEs over 2005Q1–2013Q4, we find that EME policy makers respond proactively to capital inflows by using a combination of policy tools: central banks raise the policy interest rate to address economic overheating concerns; intervene in the foreign exchange market to resist currency appreciation pressures; tighten macroprudential measures to dampen credit growth; and deploy capital inflow controls in the face of competitiveness and financial-stability concerns. Contrary to conventional policy advice to EMEs, we find no evidence of counter-cyclical fiscal policy in the face of capital inflows. Overall, policies are more likely to respond, and used in combination, during inflow surges than in more normal times.
IMF Support and Crisis Prevention
This paper examines the various roles of IMF financing in crisis prevention. Emerging market economies that experienced financial crises in the past have been subject to enormous economic and social costs, highlighting the importance of crisis prevention. While the main defense against a crisis lies in a country’s own policies and institutional framework, the IMF can contribute to these efforts through its surveillance activities, provision of technical assistance, and promotion of standards and codes. But the IMF may be able to contribute to crisis prevention more directly by providing contingent financial support. This paper explores the theoretical basis of, and empirical evidence for, possible “crisis prevention programs.”
Multilateral Aspects of Managing the Capital Account
Staff Discussion Notes showcase the latest policy-related analysis and research being developed by individual IMF staff and are published to elicit comment and to further debate. These papers are generally brief and written in nontechnical language, and so are aimed at a broad audience interested in economic policy issues. This Web-only series replaced Staff Position Notes in January 2011.
From Great Depression to Great Recession
The global financial crisis and the ensuing Great Recession raised concerns about adjustment fatigue, deflation, currency wars, and secular stagnation that presented a sense of déjà vu: similar concerns had arisen at the time of the Great Depression and at the end of World War II. As with earlier crises, these concerns prompted calls for greater international policy cooperation—both to achieve a sustainable recovery from the crisis and to prevent future crises. This volume compiles papers from a 2015 symposium of eminent scholars convened by the IMF to discuss how history can inform current debates about the functioning and challenges of the international monetary system. An introductory...
What are the Obstacles to International Policy Coordination? What Should be Done
In bilateral and multilateral surveillance, countries are often urged to consider alternative policies that would result in superior outcomes for the country itself and, perhaps serendipitously, for the world economy. While it is possible that policy makers in the country do not fully recognize the benefits of proposed alternative policies, it is also possible that the existing policies are the best that they can deliver, given their various constraints, including political. In order for the policy makers to be able and willing to implement the better policies some quid pro quo may be required—such as a favorable policy adjustment in the recipients of the spillovers; identifying such mutua...
Capital Inflows and Balance of Payments Pressures
Although capital inflows are generally beneficial to recipient countries, they also pose a challenge for the conduct of economic policy. This paper proposes a conceptual taxonomy to guide the design of policy responses in the face of capital flows. We explore how responses to capital surges should be differentiated based on the source of balance of payments pressures. We also examine whether the policy choices in emerging market countries conform to the taxonomy's predictions and find some correspondence, especially during periods of high global liquidity.
FX Intervention in the New Keynesian Model
We develop an open economy New Keynesian Model with foreign exchange intervention in the presence of a financial accelerator mechanism. We obtain closed-form solutions for the optimal interest rate policy and FX intervention under discretionary policy, in the face of shocks to risk appetite in international capital markets. The solution shows that FX intervention can help reduce the volatility of the economy and mitigate the welfare losses associated with such shocks. We also show that, when the financial accelerator is strong, the risk of multiple equilibria (self-fulfilling currency and inflation movements) is high. We determine the conditions under which indeterminacy can occur and highlight how the use of FX intervention reinforces the central bank’s credibility and limits the risk of multiple equilibria.
Regulating Capital Flows at Both Ends
This paper examines whether cross-border capital flows can be regulated by imposing capital account restrictions (CARs) in both source and recipient countries, as was originally advocated by John Maynard Keynes and Harry Dexter White. To this end, we use data on bilateral cross-border bank flows from 31 source to 76 recipient (advanced and emerging market) countries over 1995–2012, and combine this information with a new and comprehensive dataset on various outflow and inflow related capital controls and prudential measures in these countries. Our findings suggest that CARs at either end can significantly influence the volume of cross-border bank flows, with restrictions at both ends associated with a larger reduction in flows. We also find evidence of cross-border spillovers whereby inflow restrictions imposed by countries are associated with larger flows to other countries. These findings suggest a useful scope for policy coordination between source and recipient countries, as well as among recipient countries, to better manage potentially disruptive flows.
Two Targets, Two Instruments
Staff Discussion Notes showcase the latest policy-related analysis and research being developed by individual IMF staff and are published to elicit comment and to further debate. These papers are generally brief and written in nontechnical language, and so are aimed at a broad audience interested in economic policy issues. This Web-only series replaced Staff Position Notes in January 2011.
