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Controlled Capital Account Liberalization: A Proposal
Author:
Mr. Eswar S Prasad
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and
Raghuram Rajan null

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Series:
IMF Policy Discussion Papers
Volume/Issue:
Volume 2005: Issue 007
Language:
English
Publication Date:
01 Oct 2005
DOI:
https://doi.org/10.5089/9781451975741.003
ISBN:
9781451975741
ISSN:
1564-5193
Pages:
17
Keywords:
PDP; investor; foreign currency; deficit; proceeds; diversification objectives well.; Capital inflows; foreign exchange reserves; closed-end mutual fund; international portfolio diversification; diversification objectives well; A. investor education; investor portfolio; fund foreign currency; fund share; risk concentration; exchange rate appreciation; Capital account liberalization; Capital account; Currencies; Exchange rates; Capital account convertibility; Global
Legal-disclaimer:
This Policy Discussion Paper should not be reported as representing the views of the IMF. The views expressed in this Policy Discussion Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Policy Discussion Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
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In this paper, we develop a proposal for a controlled approach to capital account liberalization for economies experiencing large capital inflows. The proposal essentially involves securitizing a portion of capital inflows through closed-end mutual funds that issue shares in domestic currency, use the proceeds to purchase foreign exchange from the central bank and then invest the proceeds abroad. This would eliminate the fiscal costs of sterilizing those inflows, give domestic investors opportunities for international portfolio diversification and stimulate the development of domestic financial markets. More importantly, it would allow central banks to control both the timing and quantity of capital outflows. This proposal could be part of a broader toolkit of measures to liberalize the capital account cautiously when external circumstances are favorable. It is not a substitute for other necessary policies such as strengthening of the domestic financial sector or, in some cases, greater exchange rate flexibility. But it could in fact help create a supportive environment for these essential reforms.
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Cover IMF Policy Discussion Papers
IMF Policy Discussion Papers
ISSN:
1564-5193
Publisher:
International Monetary Fund