Should Capital Flows Be Regulated? A Look at the Issues and Policies
The author argues that externalities in financial markets, implicit and explicit guarantees on financial transactions, and information asymmetries in financial markets that may exacerbate contagion provide a rationale for a government role in manag...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/03/438338/capital-flows-regulated-look-issues-policies http://hdl.handle.net/10986/19844 |
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okr-10986-19844 |
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| recordtype |
oai_dc |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
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Digital Repositories |
| building |
World Bank Open Knowledge Repository |
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World Bank |
| language |
English en_US |
| topic |
ADVERSE CONSEQUENCES AUTONOMY BALANCE OF PAYMENTS BANK LENDING BANK RESERVES BANKING CRISES BANKING SECTOR BANKING SYSTEM BANKS BONDS BORROWING CAPITAL ACCOUNT CAPITAL CONTROLS CAPITAL FLOW REVERSALS CAPITAL FLOWS CAPITAL INFLOWS CAPITAL MARKETS CAPITAL OUTFLOWS CENTRAL BANK CENTRAL BANKS COMPETITIVENESS CONTAGION CONTINGENT LIABILITIES COST OF CAPITAL CURRENCY BOARD CURRENCY BOARDS CURRENCY CRISES CURRENCY RISK CURRENT ACCOUNT DEBT DEFAULT RISK DEFICIT FINANCING DEFICITS DEVALUATION DEVELOPING COUNTRIES DEVELOPMENT ASSISTANCE DEVELOPMENT ECONOMICS DOMESTIC ECONOMY DOMESTIC POLICIES DUMPING EMERGING ECONOMIES EMERGING MARKET ECONOMIES EMERGING MARKETS EMPIRICAL ANALYSIS EMPLOYMENT EQUILIBRIUM EQUITY MARKETS EXCHANGE RATE EXCHANGE RATE POLICIES EXCHANGE RATE POLICY EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATES EXOGENOUS SHOCKS EXPENDITURES EXTERNAL BORROWING EXTERNAL DEBT EXTERNALITIES EXTERNALITY FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIATION FINANCIAL MARKETS FINANCIAL POLICIES FINANCIAL RESOURCES FINANCIAL RISK FINANCIAL SECTOR FINANCIAL SECTORS FINANCIAL SYSTEM FINANCIAL TRANSACTIONS FISCAL DEFICITS FISCAL POLICIES FISCAL POLICY FIXED EXCHANGE RATE SYSTEMS FOREIGN ASSETS FOREIGN BORROWING FOREIGN CURRENCY FOREIGN CURRENCY DEPOSITS FOREIGN EXCHANGE GDP GLOBAL MARKETS INCOME INCOME GROUPS INFLATION INFORMATION ASYMMETRIES INSURANCE INSURANCE MARKETS INTEREST RATE INTEREST RATES INTERNATIONAL BANKING INTERNATIONAL FINANCIAL TRANSACTIONS LENDER OF LAST RESORT LENDERS OF LAST RESORT LIQUID ASSETS LIQUIDITY LIQUIDITY CONSTRAINTS LONG TERM MACROECONOMIC POLICIES MACROECONOMIC POLICY MACROECONOMIC SHOCKS MARKET DISTORTIONS MARKET PRICES MATURITIES MONETARY POLICIES MONETARY POLICY MORAL HAZARD MUTUAL FUNDS NET WORTH PERVERSE INCENTIVES POLICY OPTIONS POLICY RESEARCH PORTFOLIO PORTFOLIOS PRICE CHANGES PRIVATE AGENTS PRIVATE SECTOR PUBLIC CONSUMPTION PUBLIC DEBT PUBLIC POLICY PUBLIC SECTOR REAL EXCHANGE REAL EXCHANGE RATE REAL EXCHANGE RATES REAL INTEREST REAL INTEREST RATES REGULATORY FRAMEWORK RESERVE REQUIREMENT RESERVE REQUIREMENTS RISK MANAGEMENT RISK PREMIA RISK PREMIUMS SECURITIES SHORT TERM DEBT SHORT-TERM DEBT SYSTEMIC RISK TAX RATES TAX REVENUE TAX REVENUES TAXATION TERMS OF TRADE TRADE SHOCKS TRADEOFFS TRANSACTIONS COSTS TRANSPARENCY TREASURY BILLS |
| spellingShingle |
ADVERSE CONSEQUENCES AUTONOMY BALANCE OF PAYMENTS BANK LENDING BANK RESERVES BANKING CRISES BANKING SECTOR BANKING SYSTEM BANKS BONDS BORROWING CAPITAL ACCOUNT CAPITAL CONTROLS CAPITAL FLOW REVERSALS CAPITAL FLOWS CAPITAL INFLOWS CAPITAL MARKETS CAPITAL OUTFLOWS CENTRAL BANK CENTRAL BANKS COMPETITIVENESS CONTAGION CONTINGENT LIABILITIES COST OF CAPITAL CURRENCY BOARD CURRENCY BOARDS CURRENCY CRISES CURRENCY RISK CURRENT ACCOUNT DEBT DEFAULT RISK DEFICIT FINANCING DEFICITS DEVALUATION DEVELOPING COUNTRIES DEVELOPMENT ASSISTANCE DEVELOPMENT ECONOMICS DOMESTIC ECONOMY DOMESTIC POLICIES DUMPING EMERGING ECONOMIES EMERGING MARKET ECONOMIES EMERGING MARKETS EMPIRICAL ANALYSIS EMPLOYMENT EQUILIBRIUM EQUITY MARKETS EXCHANGE RATE EXCHANGE RATE POLICIES EXCHANGE RATE POLICY EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATES EXOGENOUS SHOCKS EXPENDITURES EXTERNAL BORROWING EXTERNAL DEBT EXTERNALITIES EXTERNALITY FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIATION FINANCIAL MARKETS FINANCIAL POLICIES FINANCIAL RESOURCES FINANCIAL RISK FINANCIAL SECTOR FINANCIAL SECTORS FINANCIAL SYSTEM FINANCIAL TRANSACTIONS FISCAL DEFICITS FISCAL POLICIES FISCAL POLICY FIXED EXCHANGE RATE SYSTEMS FOREIGN ASSETS FOREIGN BORROWING FOREIGN CURRENCY FOREIGN CURRENCY DEPOSITS FOREIGN EXCHANGE GDP GLOBAL MARKETS INCOME INCOME GROUPS INFLATION INFORMATION ASYMMETRIES INSURANCE INSURANCE MARKETS INTEREST RATE INTEREST RATES INTERNATIONAL BANKING INTERNATIONAL FINANCIAL TRANSACTIONS LENDER OF LAST RESORT LENDERS OF LAST RESORT LIQUID ASSETS LIQUIDITY LIQUIDITY CONSTRAINTS LONG TERM MACROECONOMIC POLICIES MACROECONOMIC POLICY MACROECONOMIC SHOCKS MARKET DISTORTIONS MARKET PRICES MATURITIES MONETARY POLICIES MONETARY POLICY MORAL HAZARD MUTUAL FUNDS NET WORTH PERVERSE INCENTIVES POLICY OPTIONS POLICY RESEARCH PORTFOLIO PORTFOLIOS PRICE CHANGES PRIVATE AGENTS PRIVATE SECTOR PUBLIC CONSUMPTION PUBLIC DEBT PUBLIC POLICY PUBLIC SECTOR REAL EXCHANGE REAL EXCHANGE RATE REAL EXCHANGE RATES REAL INTEREST REAL INTEREST RATES REGULATORY FRAMEWORK RESERVE REQUIREMENT RESERVE REQUIREMENTS RISK MANAGEMENT RISK PREMIA RISK PREMIUMS SECURITIES SHORT TERM DEBT SHORT-TERM DEBT SYSTEMIC RISK TAX RATES TAX REVENUE TAX REVENUES TAXATION TERMS OF TRADE TRADE SHOCKS TRADEOFFS TRANSACTIONS COSTS TRANSPARENCY TREASURY BILLS Islam, Roumeen Should Capital Flows Be Regulated? A Look at the Issues and Policies |
| relation |
Policy Research Working Paper;No. 2293 |
| description |
The author argues that externalities in
financial markets, implicit and explicit guarantees on
financial transactions, and information asymmetries in
financial markets that may exacerbate contagion provide a
rationale for a government role in managing the risk
associated with cross-border capital flows. Governments can
complement private sector risk management with measures that
help deal with the volatility of capital flows. These
measures include those that control the type and volume of
capital flows and those that help investors make better
investment decisions, and that may reduce herding behavior,
such as better information provision. The main instruments
that have been tried or recommended since the onset of the
recent financial crises can be grouped in several
categories. 1) Debt management: The composition, maturity
structure, and level of external debt have played an
important role in financial crises. High short-term debt
relative to liquid assets has been found to be consistently
correlated with financial crises in recent times.
Governments can affect the level of debt (including private
debt) and its composition, though the mix of policies they
use will vary. Prudential regulation in the financial
sector, corporate sector regulation, and restrictions on
capital movements have all been used with varying success to
change the level and composition of external debt. 2) Other
macroeconomic policies: Most countries that have suffered
macroeconomic crises have had fixed exchange rate systems;
some have not. But whether or not a country has a fixed
exchange rate is not the relevant question. The question is
instead whether there is reason to expect a significant
weakening of the currency, possibly as a result of a change
in policy stance. Large real exchange rate appreciations
have been among the main reasons for runs on currency;
macroeconomic policy needs to be aimed at managing these.
With a fixed exchange rate regime, flexibility must be
maintained elsewhere in the economy. Policymakers may need
to make tradeoffs between price and output stability once
market jitters have set in. There is no single right answer
to the question of which to emphasize more at a given time;
it depends on a country's circumstances. 3) Risk
management in the financial sector: The health of the
financial sector is related to the government's fiscal
position, its macroeconomic policies, and financial crises.
The regulatory and supervisory frameworks in developing
countries need to be adapted to the special features of
these markets. Many developing countries are subject to
frequent trade and capital account shocks, while lacking the
means to deal with these shocks, such as adequate insurance
markets. This situation may call for policies that nor only
affect the incentives of lenders, but also help manage risk
more directly. Examples of such policies include maturity,
and liquidity requirements. 4) Information and transparency:
More disclosure of information and improvements in the
quality of that information could reduce the volatility that
arises from herding behavior. Ex ante, they may also have a
beneficial effect on the allocation of capital. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Islam, Roumeen |
| author_facet |
Islam, Roumeen |
| author_sort |
Islam, Roumeen |
| title |
Should Capital Flows Be Regulated? A Look at the Issues and Policies |
| title_short |
Should Capital Flows Be Regulated? A Look at the Issues and Policies |
| title_full |
Should Capital Flows Be Regulated? A Look at the Issues and Policies |
| title_fullStr |
Should Capital Flows Be Regulated? A Look at the Issues and Policies |
| title_full_unstemmed |
Should Capital Flows Be Regulated? A Look at the Issues and Policies |
| title_sort |
should capital flows be regulated? a look at the issues and policies |
| publisher |
World Bank, Washington, DC |
| publishDate |
2014 |
| url |
http://documents.worldbank.org/curated/en/2000/03/438338/capital-flows-regulated-look-issues-policies http://hdl.handle.net/10986/19844 |
| _version_ |
1764441658662846464 |
| spelling |
okr-10986-198442021-04-23T14:03:47Z Should Capital Flows Be Regulated? A Look at the Issues and Policies Islam, Roumeen ADVERSE CONSEQUENCES AUTONOMY BALANCE OF PAYMENTS BANK LENDING BANK RESERVES BANKING CRISES BANKING SECTOR BANKING SYSTEM BANKS BONDS BORROWING CAPITAL ACCOUNT CAPITAL CONTROLS CAPITAL FLOW REVERSALS CAPITAL FLOWS CAPITAL INFLOWS CAPITAL MARKETS CAPITAL OUTFLOWS CENTRAL BANK CENTRAL BANKS COMPETITIVENESS CONTAGION CONTINGENT LIABILITIES COST OF CAPITAL CURRENCY BOARD CURRENCY BOARDS CURRENCY CRISES CURRENCY RISK CURRENT ACCOUNT DEBT DEFAULT RISK DEFICIT FINANCING DEFICITS DEVALUATION DEVELOPING COUNTRIES DEVELOPMENT ASSISTANCE DEVELOPMENT ECONOMICS DOMESTIC ECONOMY DOMESTIC POLICIES DUMPING EMERGING ECONOMIES EMERGING MARKET ECONOMIES EMERGING MARKETS EMPIRICAL ANALYSIS EMPLOYMENT EQUILIBRIUM EQUITY MARKETS EXCHANGE RATE EXCHANGE RATE POLICIES EXCHANGE RATE POLICY EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATES EXOGENOUS SHOCKS EXPENDITURES EXTERNAL BORROWING EXTERNAL DEBT EXTERNALITIES EXTERNALITY FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL INSTITUTIONS FINANCIAL INTERMEDIATION FINANCIAL MARKETS FINANCIAL POLICIES FINANCIAL RESOURCES FINANCIAL RISK FINANCIAL SECTOR FINANCIAL SECTORS FINANCIAL SYSTEM FINANCIAL TRANSACTIONS FISCAL DEFICITS FISCAL POLICIES FISCAL POLICY FIXED EXCHANGE RATE SYSTEMS FOREIGN ASSETS FOREIGN BORROWING FOREIGN CURRENCY FOREIGN CURRENCY DEPOSITS FOREIGN EXCHANGE GDP GLOBAL MARKETS INCOME INCOME GROUPS INFLATION INFORMATION ASYMMETRIES INSURANCE INSURANCE MARKETS INTEREST RATE INTEREST RATES INTERNATIONAL BANKING INTERNATIONAL FINANCIAL TRANSACTIONS LENDER OF LAST RESORT LENDERS OF LAST RESORT LIQUID ASSETS LIQUIDITY LIQUIDITY CONSTRAINTS LONG TERM MACROECONOMIC POLICIES MACROECONOMIC POLICY MACROECONOMIC SHOCKS MARKET DISTORTIONS MARKET PRICES MATURITIES MONETARY POLICIES MONETARY POLICY MORAL HAZARD MUTUAL FUNDS NET WORTH PERVERSE INCENTIVES POLICY OPTIONS POLICY RESEARCH PORTFOLIO PORTFOLIOS PRICE CHANGES PRIVATE AGENTS PRIVATE SECTOR PUBLIC CONSUMPTION PUBLIC DEBT PUBLIC POLICY PUBLIC SECTOR REAL EXCHANGE REAL EXCHANGE RATE REAL EXCHANGE RATES REAL INTEREST REAL INTEREST RATES REGULATORY FRAMEWORK RESERVE REQUIREMENT RESERVE REQUIREMENTS RISK MANAGEMENT RISK PREMIA RISK PREMIUMS SECURITIES SHORT TERM DEBT SHORT-TERM DEBT SYSTEMIC RISK TAX RATES TAX REVENUE TAX REVENUES TAXATION TERMS OF TRADE TRADE SHOCKS TRADEOFFS TRANSACTIONS COSTS TRANSPARENCY TREASURY BILLS The author argues that externalities in financial markets, implicit and explicit guarantees on financial transactions, and information asymmetries in financial markets that may exacerbate contagion provide a rationale for a government role in managing the risk associated with cross-border capital flows. Governments can complement private sector risk management with measures that help deal with the volatility of capital flows. These measures include those that control the type and volume of capital flows and those that help investors make better investment decisions, and that may reduce herding behavior, such as better information provision. The main instruments that have been tried or recommended since the onset of the recent financial crises can be grouped in several categories. 1) Debt management: The composition, maturity structure, and level of external debt have played an important role in financial crises. High short-term debt relative to liquid assets has been found to be consistently correlated with financial crises in recent times. Governments can affect the level of debt (including private debt) and its composition, though the mix of policies they use will vary. Prudential regulation in the financial sector, corporate sector regulation, and restrictions on capital movements have all been used with varying success to change the level and composition of external debt. 2) Other macroeconomic policies: Most countries that have suffered macroeconomic crises have had fixed exchange rate systems; some have not. But whether or not a country has a fixed exchange rate is not the relevant question. The question is instead whether there is reason to expect a significant weakening of the currency, possibly as a result of a change in policy stance. Large real exchange rate appreciations have been among the main reasons for runs on currency; macroeconomic policy needs to be aimed at managing these. With a fixed exchange rate regime, flexibility must be maintained elsewhere in the economy. Policymakers may need to make tradeoffs between price and output stability once market jitters have set in. There is no single right answer to the question of which to emphasize more at a given time; it depends on a country's circumstances. 3) Risk management in the financial sector: The health of the financial sector is related to the government's fiscal position, its macroeconomic policies, and financial crises. The regulatory and supervisory frameworks in developing countries need to be adapted to the special features of these markets. Many developing countries are subject to frequent trade and capital account shocks, while lacking the means to deal with these shocks, such as adequate insurance markets. This situation may call for policies that nor only affect the incentives of lenders, but also help manage risk more directly. Examples of such policies include maturity, and liquidity requirements. 4) Information and transparency: More disclosure of information and improvements in the quality of that information could reduce the volatility that arises from herding behavior. Ex ante, they may also have a beneficial effect on the allocation of capital. 2014-08-28T19:05:39Z 2014-08-28T19:05:39Z 2000-03 http://documents.worldbank.org/curated/en/2000/03/438338/capital-flows-regulated-look-issues-policies http://hdl.handle.net/10986/19844 English en_US Policy Research Working Paper;No. 2293 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research |