Controlled Capital Account Liberalization: A Proposal

October 1, 2005

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Eswar S Prasad, and Raghuram Rajan. Controlled Capital Account Liberalization: A Proposal, (USA: International Monetary Fund, 2005) accessed November 21, 2024

Disclaimer: This Policy Dicussion Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Balance of payments, Capital account, Capital account convertibility, Capital account liberalization, Currencies, Exchange rates, Foreign exchange, Money

Keywords: A. investor education, Capital account, Capital account convertibility, Capital account liberalization, Capital inflows, Closed-end mutual fund, Currencies, Deficit, Diversification objectives well, Diversification objectives well., Exchange rate appreciation, Exchange rates, Foreign currency, Foreign exchange reserves, Fund foreign currency, Fund share, Global, International portfolio diversification, Investor, Investor portfolio, PDP, Proceeds, Risk concentration

Publication Details

Pages:

17
Volume:

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DOI:

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Issue:

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Series:

Policy Discussion Paper No. 2005/007
Stock No:

PPIEA2005007
ISBN:

9781451975741
ISSN:

1564-5193

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