The International Monetary Fund (IMF) has developed a comprehensive, flexible, and balanced view on the management of global capital flows to help give countries clear and consistent policy advice.
Global capital flows have increased dramatically in the last decade, from an average of less than 5 percent of global GDP during 1980-1999 to a peak of about 20 percent by 2007. In the past, countries' capital accounts have ranged from almost completely closed to completely open and, while most countries have moved in the direction of greater openness, wide differences remain. The issue of when, how and how much to liberalize capital flows have been one of the most contentious in the global economic policy debate for decades.
The free flow of capital across the globe can have important benefits for countries and for the global economy. For example, capital flows can help a country's financial sector to become more competitive and sophisticated.
At the global level, they can achieve a better allocation of capital that fosters higher growth, and help smooth the adjustment of economic imbalances between countries.
Capital flows can also pose important risks however. They are volatile and can be large relative to the size of a country's financial markets or economy. This can lead to booms and busts in credit or asset prices, and makes countries more vulnerable to contagion from global instability.
The global crisis is the latest in a series of events that have shown that policymakers need to be vigilant to the risks, while maximizing the benefits of capital flows.
The new institutional view is the culmination of work begun two years ago to develop a pragmatic, experience-based approach to help countries cope with capital flows.
The IMF has published several studies on capital flows that underpin this institutional view, and on December 3 issued a synthesis of its work that the IMF Executive Board endorsed. The goal is to help countries reap the benefits of capital flows, while managing their risks.
"We need to be in a position to provide clear and consistent advice with respect to capital flows and the policies related to them," said David Lipton, the IMF's First Deputy Managing Director.
"This work clarifies the trade-offs between policy options for dealing with the risks related to capital flows, harnessing the benefits of capital mobility, and addressing the implications of capital flow management for global economic and financial stability."