International Monetary Fund. Monetary and Capital Markets Department
The Annual Report on Exchange Arrangements and Exchange Restrictions has been published by the IMF since 1950. It draws on information available to the IMF from a number of sources, including that provided in the course of official staff visits to member countries, and has been prepared in close consultation with national authorities.
International capital flows can create significant financial instability in emerging economies
because of pecuniary externalities associated with exchange rate movements. Does this make
it optimal to impose capital controls or should policymakers rely on domestic
macroprudential regulation? This paper presents a tractable model to show that it is desirable
to employ both types of instruments: Macroprudential regulation reduces overborrowing,
while capital controls increase the aggregate net worth of the economy as a whole by also
stimulating savings. The two policy measures should be set higher the greater an economy's
debt burden and the higher domestic inequality. In our baseline calibration based on the East
Asian crisis countries, we find optimal capital controls and macroprudential regulation in the
magnitude of 2 percent. In advanced countries where the risk of sharp exchange rate
depreciations is more limited, the role for capital controls subsides. However,
macroprudential regulation remains essential to mitigate booms and busts in asset prices.
This paper provides an updated review of Fund-supported programs undertaken during the global financial crisis. It follows a series of previous reviews during 2009–12 that assessed program design and outcomes during the surge in Fund supported programs since 2008.
The review covers experience during 2008–15 for 32 arrangements financed from the Fund's general resources account (GRA). It covers 27 countries for which arrangements were approved during September 2008–June 2013, with two years or more of program performance.
This paper discusses Iceland’s Fourth Post-Program Monitoring Discussions. Iceland’s economy has grown strongly on the back of booming tourism. Real GDP grew 3.3 percent in 2013, despite a drop in investment spending. Net exports were the primary driver. High frequency indicators suggest strong net exports—including steady growth in off-season tourism—have continued in Q1 2014, along with rising private consumption. Inflation has fallen below the Central Bank of Iceland’s 2.5 percent target but long-term inflation expectations remain noticeably above this level. The government’s medium-term fiscal objectives deserve support, but further effort is needed to achieve them.
Liberalization of capital flows can benefit both source and recipient countries by improving resource allocation, reducing financing costs, increasing competition and accelerating the development of domestic financial systems. The empirical evidence, however, is mixed on the benefits, and it suggests that countries benefit most when they meet certain thresholds related to institutional and financial development. The principal cost of capital flow liberalization stems from the economic instability brought on by volatile capital flows. In extreme cases, sudden stops or reversals in capital inflows can trigger financial crises followed by prolonged periods of weak growth.
This paper evaluates the IMF’s exchange rate analysis since the 2008 TSR. It focuses on the evolution of methods, the quality of the IMF‘s multilateral and bilateral exchange rate analysis, the evenhandedness and transparency of this analysis, and the need to improve the coverage and integration of external stability assessments.
After widening substantially in the period preceding the global financial crisis, current account imbalances across the world have contracted to a significant extent. This paper analyzes the factors underlying this process of external adjustment. It finds that countries whose pre-crisis current account balances were in excess of what could be explained by economic fundamentals have experienced the largest contractions in their external balance. External adjustment in deficit countries was achieved primarily through demand compression, rather than expenditure switching. Changes in other investment flows were the main channel of financial account adjustment, with official external assistance and ECB liquidity cushioning the exit of private capital flows for some countries.
Iceland’s gross external debt rose above 600 percent of GDP, while households and corporations accumulated heavy debt burdens with large exposures to foreign exchange and inflation risk. The global banking crisis exposed Iceland’s vulnerabilities, triggering a balance-of-payments crisis, a collapse of the exchange rate and output, and the failure of financial and many nonfinancial firms. The importance of accelerating the restructuring of banks’ operations and balance sheets and also policy frameworks has been stressed. The downward trend in inflation is welcomed.