This series aims to make available to the general public and to economic policy practitioners, a selection of policy papers prepared by the staff of the International Monetary Fund. Papers in the International Economic Policy Review will offer specific policy-relevant analysis, but at a relatively non-technical level. These papers are intended to provide analytical background for IMF-supported programs and more generally to shed light on a range of policy choices facing ministries and central banks.
Additional urgency should be attached to financial sector reform when a country begins to liberalize its capital account. The adoption of prudential regulations based on generally accepted best practices will normally not entail restrictions on capital flows and will support the move toward capital account convertibility. Monetary and exchange rate policy will be constrained by increased capital flows, and monetary instruments should be evolved toward more market-based arrangements. Discriminatory reserve requirements can introduce a wedge between domestic and foreign interest rates. The sequencing of liberalizations should reflect the more general objectives of improving efficiency and promoting financial and macroeconomic stability.
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