Managing Capital Flows: What is the Right Policy Mix?

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Managing Capital Flows: What is the Right Policy Mix?

Location: HQ1 Atrium, HQ1-1-700

Maps

Seminar Report

Moderator: David Lipton, First Deputy Managing Director, IMF

Panelists:

Mark Carney, Governor, Bank of England

Stanley Fischer, former Vice Chairman of the US Federal Reserve

Elvira Nabiullina, Governor of the Central Bank of Russia

Raghuram Rajan, Professor of Finance, University of Chicago Booth School of Business

Nor Shamsiah Mohd Yunus, Governor, Bank Negara Malaysia

Panelists shared their views on challenges to policy managers of macroeconomic management brought by capital flows, and a possible policy framework to manage flows going forward.

Key Points:

· Foreign exchange intervention. Fischer commented on his experience as Governor of the Bank of Israel during the Great Financial Crisis and the positive use of foreign exchange market intervention to deal with major capital inflows episodes in a low interest rate scenario. Yunus highlighted that the policy mix may be adversely influenced by capital flows and, thus, capital controls may help policy makers in rebalancing the policy mix. Fischer suggested that while it is may be possible to refrain from interventions for large countries, interventions may be needed to manage capital flows in small countries which are more exposed to these flows.

· Building resilience against shocks. Rajan noted that capital inflows may lead to an increase in corporate sector leverage in the inflow countries. In this context, Nabiullina, noted the importance of building resilience against shocks and the importance of establishing adequate preventive measures, such as measures to strengthen debt sustainability and macroprudential policies to deal with corporate leverage.

· Policy mix and central bank credibility. Yunus highlighted that transparency was essential when using capital control measures. Nabiulina stressed that controls on capital outflows tended to undermine central bank credibility. Panelists, in general, underscored the key role of central bank credibility in managing macroprudential policies.

· Spillovers and international responsibility. Rajan noted the major changes on the policy mix in advanced and emerging markets economies and wondered whether international spillovers should be included in the central banks’ reaction function.

· Framework and IMF’s contribution. Carney highlighted the three buckets of factors that influence capital flows: push factors (basically, the global financial cycle), pipes (international market structures and the nature of the flows), and pull factors (linked to domestic factors, including fiscal policy, central bank credibility, and macroprudential policy). He highlighted the IMF’s unique position in leading the discussions on these factors.

Quotes:

“When we say to ‘getting the right policy mix’, we have to consider other policy areas, how monetary policy, foreign exchange intervention policies, macroprudential policy and capital flow management policy may all fit together, what are the right mix, and what are the trade-offs.” David Lipton

“We could have lost control of the exchange rate. We didn’t, but we had to scramble from time to time and it worked.” Stanley Fischer

“By now the market is not especially volatile and the central bank continues to intervene (…). So, it must certainly be what the Fund doesn’t approve of and, again, you have to say, ‘if you are doing the wrong thing what is the damage?’. And I must confess I can’t’ actually figure out what the big damage is.” Stanley Fischer

“Increasingly, we are asking the question: are the benefits domestically of higher growth and then spillovers of this higher growth to the rest of the world, do they outweigh the cost of this spillovers effects through capital flows and the raising leverage in other countries, which then needs to be counteracted and then could create problems.” Raghuram Rajan

“I think that what the Fund can do is to try to pull all this together and dimension these various factors – it is an ambitious task, but it is in the core of its mandate.” Mark Carney

Contributor: Daniela Alcantara

How should emerging markets manage large and volatile flows of foreign capital across their borders? The traditional answer has been to use flexible exchange rates as a shock absorber. But flexible exchange rates do not offer full insulation, may not reflect economic fundamentals, and may themselves be too volatile. As a result, country authorities sometimes reach for a mix of tools, including monetary policy, intervention in the currency market, and macroprudential- and capital flow measures. This seminar explores whether and how a more integrated toolkit could be more effective in navigating complex policy tradeoffs. Would such an integrated approach improve outcomes? Or would it make policy less transparent and undermine hard-earned policy credibility?

Join the conversation: #CapitalFlows

Moderator

David Lipton
First Deputy Managing Director, IMF

David Lipton assumed the position of First Deputy Managing Director of the International Monetary Fund on September 1, 2011. On March 28, 2016, he was reappointed for a second five-year term beginning September 1, 2016. Before coming to the Fund, Mr. Lipton was Special Assistant to the President, and served as Senior Director for International Economic Affairs at the National Economic Council and National Security Council at the White House. Previously, he was a Managing Director at Citi, and also served in the Clinton administration as Under Secretary of the Treasury for International Affairs — and before that as Assistant Secretary. Mr. Lipton earned a Ph.D. and M.A. from Harvard University in 1982 and a B.A. from Wesleyan University in 1975.

Panelists

Mark Carney
Governor, Bank of England

Mark Carney is the Governor of the Bank of England and Chair of the Monetary Policy Committee, Financial Policy Committee and the Prudential Regulation Committee. His appointment as Governor was approved by Her Majesty the Queen on 26 November 2012. The Governor joined the Bank on 1 July 2013.

In addition to his duties as Governor of the Bank of England, he serves as First Vice-Chair of the European Systemic Risk Board, a member of the Group of Thirty and the Foundation Board of the World Economic Forum.

Mark Carney was born in Fort Smith, Northwest Territories, Canada in 1965. He received a bachelor’s degree in Economics from Harvard University in 1988. He went on to receive a master’s degree in Economics in 1993 and a doctorate in Economics in 1995, both from Oxford University.

Stanley Fischer
former Vice Chairman of the US Federal Reserve

Stanley Fischer served as Vice Chairman of the U.S. Federal Reserve from 2014 to 2017. Previously, Dr. Fischer was Governor of the Bank of Israel from 2005 to 2013 and Vice Chairman of Citigroup from 2002 to 2005. He served as First Deputy Managing Director of the IMF from 1994 to 2001. From 1988 to 1990, he was chief economist of the World Bank. He holds a PhD from the Massachusetts Institute of Technology and taught economics there from 1973 to 1999.

Elvira Nabiullina
Governor, Central Bank of Russia

Elvira Nabiullinais theGovernor of the Central Bank of Russia since June 2013. Before that, she served for one year as Advisor to the President of the Russian Federation on Economic Affairs. From 2007 to 2012, she held two consecutive ministerial posts: Minister of Economic Development and Trade (2007–08), where she had previously served as First Deputy Minister (2000–03), and as Minister of Economic Development (2008-2012). In 2003, she was appointed President of the Center for Strategic Research Foundation, where she had beenVice President from 1999 to 2000. She also headed the Expert Council of the Organizing Committee for Russia’s G8 Presidency in 2006. Ms. Nabiullina started her career in 1991 at the Directorate on Economic Reform of the Standing Committee of the USSR Scientific and Industrial Union Board.

Raghuram Rajan
Professor of Finance, The University of Chicago Booth School of Business

Raghuram Govind Rajanis the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. He was Governor of the Reserve Bank of India from 2013 to 2016. From 2003 to 2006, Dr.Rajan was Economic Counsellor and Director of Research at the International Monetary Fund.He was a Professor of Finance at the Booth School from 1997 to 2003 and from 2006 to 2013. Dr. Rajan is a member of the Group of Thirty. He was the President of the American Finance Association in 2011 and is a member of the American Academy of 3Arts and Sciences. He holds a PhD from the Massachusetts Institute of Technology.

Nor Shamsiah Yunus
Governor, Bank Negara Malaysia

Nor Shamsiah Yunus is the 9th Governor of Bank Negara Malaysia. Appointed in July 2018, she was the Deputy Governor of Bank Negara Malaysia from 2010 until 2016. Nor Shamsiah Yunus was the Deputy Governor of Bank Negara Malaysia from 2010 until 2016. She recently served as Assistant Director of the Monetary and Capital Markets Division of the International Monetary Fund.

As Deputy Governor, Datuk Nor Shamsiah was responsible for banking, insurance and Takaful supervision, financial intelligence and enforcement, talent management, finance and shared services of the central bank.Nor Shamsiah Yunus joined Bank Negara Malaysia in 1987 and has served in various areas including prudential regulations, legislation, policies and guidelines for the financial sector and supervision. She was involved in the financial sector resolution initiatives during the Asian financial crisis. She played a key role in the formulation and implementation of the Financial Sector Masterplan (2001-2010) and Financial Sector Blueprint (2011-2020) that charts the development of the Malaysian financial system.

Nor Shamsiah Yunus graduated from the University of South Australia with a Bachelor of Arts Degree in Accountancy and is a Certified Practising Accountant (CPA).

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