Capital controls in the 21st century
Barry Eichengreen, Andrew K Rose 05 June 2014
Since the global financial crisis of 2008–2009, opposition to the use of capital controls has weakened, and some economists have advocated their use as a macroprudential policy instrument. This column shows that capital controls have rarely been used in this way in the past. Rather than moving with short-term macroeconomic variables, capital controls have tended to vary with financial, political, and institutional development. This may be because governments have other macroeconomic policy instruments at their disposal, or because suddenly imposing capital controls would send a bad signal.
Capital controls are back. The IMF (2012) has softened its earlier opposition to their use. Some emerging markets – Brazil, for example – have made renewed use of controls since the global financial crisis of 2008–2009. A number of distinguished economists have now suggested tightening and loosening controls in response to a range of economic and financial issues and problems. While the rationales vary, they tend to have in common the assumption that first-best policies are unavailable and that capital controls can be thought of as a second-best intervention.
IMF, capital flows, global financial crisis, capital controls, capital, Macroprudential policy
Who is to blame for the credit crunch: foreign ownership or foreign funding?
Erik Feyen, Raquel Letelier, Inessa Love, Samuel Munzele Maimbo, Roberto Rocha 15 March 2014
Eastern Europe was hit especially hard by the credit crunch during the global financial crisis. This column presents new evidence suggesting that reliance on foreign funding was more important than foreign bank ownership per se in exacerbating the post-crisis credit contraction. These findings point to the need to put more emphasis on the discussion of bank business models, regulatory standards, and supervisory arrangements.
From boom to crunch
Although most developing countries around the world experienced a severe contraction of bank credit during the recent global financial crisis, the Eastern Europe and Central Asia (ECA) region was disproportionately hit after it had experienced very high credit growth (Figure 1).
Figure 1. Banking system trends in ECA
Financial markets Global crisis International finance
Credit crunch, global financial crisis, banking, Eastern Europe, cross-border banking, credit growth, Central Asia
Remittances and vulnerability in developing countries: Results from a new dataset on remittances from Italy
Giulia Bettin, Andrea F Presbitero, Nikola Spatafora 10 February 2014
Remittances are one of the most important financial flows to developing countries – more than three times the level of official development assistance. This column presents recent research on remittance flows from Italy. Their limited volatility and countercyclical behaviour with respect to macroeconomic conditions in the recipient country help mitigate developing countries’ vulnerability to external shocks. Better access to financial services for migrants can foster remittance flows.
Remittances from migrant workers currently represent one of the most important financial flows to developing countries. They can play an important role in pulling millions of families out of poverty. It is therefore critical to identify the key factors affecting remittances, as well as the barriers to these flows (Beck and Martinez Peria 2009 ). In particular, it is important to understand how remittances depend on macroeconomic conditions in the migrants’ host country and country of origin, and how they were affected by the global financial crisis.
Italy, migration, global financial crisis, financial development, Remittances
Tracking the causes of Eurozone external imbalances: New evidence
Jose Luis Diaz Sanchez, Aristomene Varoudakis 06 February 2014
External imbalances within the Eurozone grew substantially between the introduction of the euro in 1999 and the global financial crisis of 2008–09. Using new empirical evidence, this column argues that imbalances in the Eurozone periphery were mainly driven by a domestic demand boom, triggered by greater financial integration, with changes in the periphery’s competitiveness playing only a minor role. Internal devaluation may thus have been of limited effectiveness in restoring external balances, although better external competitiveness may eventually boost medium-term growth.
The Eurozone sovereign debt crisis, triggered by the 2008–09 global financial crisis, exposed macroeconomic imbalances in member countries that had accrued gradually following the advent of the euro in 1999. The growing current-account deficits in the Eurozone periphery and surpluses in the core were a main symptom of these imbalances (Figure 1).1 These patterns of intra-Eurozone current-account imbalances led to the accumulation of large external debts in the Eurozone periphery, matched by growing claims held by commercial banks in the core.
competitiveness, eurozone, global imbalances, global financial crisis, European sovereign debt crisis
Turmoil in emerging markets: What’s missing from the story?
Kristin Forbes 05 February 2014
The Federal Reserve’s ‘taper talk’ in spring 2013 has been blamed for outflows of capital from emerging markets. This column argues that global growth prospects and uncertainty are more important drivers of emerging-market capital flows than US monetary policy. Although crises can affect very different countries simultaneously, over time investors begin to discriminate between countries according to their fundamentals. Domestic investors play an increasingly important – and potentially stabilising – role. During a financial crisis, ‘retrenchment’ by domestic investors can offset foreign investors’ withdrawals of capital.
Emerging markets are going through another period of volatility – and the most popular boogeyman is the US Federal Reserve.
The basic storyline is that less accommodative US monetary policy has caused foreign investors to withdraw capital from emerging markets, causing currency depreciations, equity declines, and increased borrowing costs. In many cases, these adjustments will slow growth and increase the risk of some type of crisis.
Federal Reserve, capital flows, emerging markets, global financial crisis, tapering
How did the Global Financial Crisis misalign East Asian currencies?
Eiji Ogawa, Zhiqian Wang 19 January 2014
Since the East Asian financial crisis of 1997, the emphasis on regional monetary cooperation has grown. This column discusses recent research into intra-regional exchange rate misalignments. In the aftermath of the Global Financial Crisis, investors in the US and Europe withdrew from emerging markets, causing a depreciation of emerging-market currencies against the US dollar. At the same time, the appreciation of the Japanese yen – fuelled in part by intra-regional capital flows – has increased the misalignment of intra-regional exchange rates.
Some East Asian countries experienced a serious currency crisis in 1997. The crisis was blamed on both the de facto US dollar peg system and double mismatches of domestic financial institutions’ balance sheets in terms of currency and maturity. Following the Asian currency crisis, recognition of the importance of regional monetary cooperation has steadily grown. Specifically, the monetary authorities of most East Asian countries have come to perceive the importance of monitoring intra-regional exchange rates.
Exchange rates International finance
exchange rates, financial crisis, global financial crisis, currency crisis, East Asian financial crisis
Why fiscal sustainability matters
Willem Buiter 10 January 2014
Fiscal sustainability has become a hot topic as a result of the European sovereign debt crisis, but it matters in normal times, too. This column argues that financial sector reforms are essential to ensure fiscal sustainability in the future. Although emerging market reforms undertaken in the aftermath of the financial crises of the 1990s were beneficial, complacency is not warranted. In the US, political gridlock must be overcome to reform entitlements and the tax system. In the Eurozone, creating a sovereign debt restructuring mechanism should be a priority.
Does fiscal sustainability matter only when there is a fiscal house on fire, as was the case with the Greek sovereign insolvency in 2011–12? Far from it.
Financial markets Global crisis International finance Macroeconomic policy
eurozone, sovereign debt, capital flows, financial crisis, credit booms, fiscal policy, emerging markets, global financial crisis, banking, banks, Eurozone crisis, Currency wars, fiscal sustainability, banking union, sovereign debt restructuring, balance-sheet recession
The next sudden stop
Sebnem Kalemli-Ozcan 07 January 2014
Financial crises are generally preceded by credit booms and a build-up of external debts. Although it is unclear whether Turkey is experiencing a financial bubble, as of 2013, 58% of the corporate sector’s debt was denominated in foreign currencies. This column argues that this explains the Central Bank of Turkey’s interventions to prop up the value of the Turkish lira. Given the relatively low level of reserves and the unfolding corruption scandal, it is a critical question how long the Bank can continue to do so.
The ominous facts are well known – the strongest predictors of financial crises are domestic credit booms and external debts (Reinhart and Rogoff 2011). In emerging markets, credit booms are generally preceded by large capital inflows (Reinhart and Reinhart 2010). Many high-growth emerging markets have been receiving capital inflows for the last five years as the developed economies have been attending to their wounds from the Global Financial Crisis. Now the tide is reversing. Emerging markets are experiencing slowdowns in growth and widening current-account deficits.
Financial markets International finance
capital flows, emerging markets, global financial crisis, sudden stops, Turkey, tapering, liability dollarisation
Policymaking in crises: Pick your poison
Kristin Forbes, Michael W Klein 24 December 2013
Government interventions to control capital flows and reduce exchange-rate volatility have long been controversial. The Global Financial Crisis has made the debate more urgent. This column discusses recent research that evaluates such policies against the counterfactual of no intervention. Depreciations and reserve sales can boost GDP growth during crises, but may also substantially increase inflation. Large increases in interest rates and new capital controls are associated with reductions in GDP growth, with no significant effect on inflation. When faced with sudden shifts in capital flows, policymakers must ‘pick their poison’.
In 2010, the Brazilian finance minister Guido Mantenga declared a ‘currency war’ because of the harmful effects of the strengthening of the real. He blamed the currency’s appreciation on easy money in advanced countries, and to a lesser extent on reserve accumulation in some emerging markets. More recently, concerns were raised by slides in the values of the Indian rupee – which lost 18% of its value against the dollar between February and August – and by the fall in the value of the Indonesian rupiah – which has lost almost a quarter of its value against the US dollar in 2013.
Exchange rates Macroeconomic policy
exchange rates, foreign exchange reserves, India, Indonesia, global financial crisis, capital controls, Brazil, currency war
Single supervision and resolution rules: Is ECB independence at risk?
Donato Masciandaro, Francesco Passarelli 21 December 2013
During the Great Moderation, central banks focused on price stability, and independence was seen as crucial to limit inflation bias. Since the Global Financial Crisis, emergency support measures for banks, and central banks’ increasing involvement in supervision, have called central bank independence into question. This column argues that the literature has overlooked the distributional effects of the tradeoff between monetary and financial stability. In a political economy framework, heterogeneity in voters’ portfolios can cause the degree of central bank independence to differ from the social optimum.
A successful transition to a European Banking Union requires robust and credible ‘Chinese walls’ between the ECB’s role as monetary authority and any responsibility in the Single Supervisory Mechanism or in the resolution rules. Otherwise, the ECB’s independence would be at risk, given that monetary policy would likely have larger distributional effects.
EU institutions Financial markets
ECB, Central Banks, central bank independence, global financial crisis, banking regulation, bank resolution, banking union