IMF considers benefits of capital flow management in policy re-think
Emerging markets are more exposed than ever to booms and busts of the world’s largest economies, prompting the IMF to rip up its orthodox policy rulebook as it re-thinks its advice on non-standard monetary policy measures.
The IMF is reviewing its approach to unorthodox central bank tools such as currency intervention and capital-flow management as it looks to create a modern policy framework that better reflects the needs of developing economies in a more integrated global market system.
The move marks a departure from its traditional role as an advocate of conventional monetary policy.
The Fund is in talks with a number of countries, finance ministers and central banks to devise a new integrated policy framework, David Lipton, first deputy managing director of the IMF, tells Euromoney.
“Our aim is that over time we will be able to have a more complete playbook to help [central banks],” he says.
“Our advice will be to countries that are free sailing in choppy waters, which is different to a programme or a crisis. A lot of the work we are doing is focused on macro prudential tools and capital-flow measures to modulate the breadth of the likely outcomes and avoid extreme booms and busts.”
These markets are so big that even a sizeable intervention won’t make a huge difference - David Lipton, IMF
Free markets, a liberalized exchange rate and an open economy have been central tenets of the IMF’s advice on monetary policy since the Fund was formed in 1945, but greater dollarization and integration of financial markets has meant that smaller economies are now more exposed than ever to global market forces, prompting a re-think on its advice.