The International Monetary Fund has cemented a substantial ideological shift by accepting the use of direct controls to calm volatile cross-border capital flows, as employed by emerging market countries in recent years.
Although the fund continued to warn that such controls should be “targeted, transparent, and generally temporary”, the policy, announced in a staff paper released yesterday, is a sharp change from the fund’s enthusiasm for liberalising capital accounts during the 1990s.
Economies including Brazil – which has fiercely criticised super-loose US monetary policy for fuelling speculative inflows to its asset markets – Thailand and South Korea have experimented with taxes, regulations and other restrictions on capital. The Brazilian representative at the IMF said the fund was still too cautious and regarded capital controls as a last resort rather than a standard part of the policy tool kit.