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

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  • Daniela Gabor

    (University of the West of England)

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.

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  • Daniela Gabor, 2011. "Paradigm shift? A critique of the IMF’s new approach to capital controls," Working Papers 1109, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
    • Handle: RePEc:uwe:wpaper:1109
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    Cited by:

    1. Ali Burak Güven, 2012. "The IMF, the World Bank, and the Global Economic Crisis: Exploring Paradigm Continuity," Development and Change, International Institute of Social Studies, vol. 43(4), pages 869-898, July.

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    More about this item

    Keywords

    IMF; capital controls; financial crisis; global liquidity; shadow banks; sterilizations; central banks.;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy

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