February 10, 2011
Capital flows have grown to dominate international transactions for many countries, notably amongst advanced economies but also increasingly for emerging markets. Greater capital mobility can confer many benefits, including facilitating a more efficient allocation of capital, improving risk sharing, transferring know-how, and encouraging greater discipline in policymaking. However, in emerging markets in particular, these flows have proven to be large and volatile, and the directionality of flows has predominantly been pro-cyclical, exacerbating domestic booms and busts. In view of their size, volatility and impact, capital flows have become an integral part of the IMS, with a corresponding need to attenuate their deleterious effects while maximizing their benefits.
Key to such an endeavor is to develop a better understanding of the drivers behind capital flows, including domestic policies in both supplier and recipient countries and global liquidity conditions; develop practical guidelines on policies and tools, including prudential policies and capital controls, that countries can use in managing these flows; foster dialogue between recipients and suppliers of these flows; and identify and fill data gaps. In addition, a question is whether, by these reforms, the demand for reserve assets can be dampened.