IMF releases capital control guidelines
Thursday April 07 2011 | 05:09 AM

The International Monetary Fund has proposed guidelines for controlling capital inflows in a bid to help countries combat so-called "hot money".

In a marked U-turn from previous policy, the Washington-based body recommends nine key elements that should be considered to control the inflows affecting emerging markets.

It advises that capital controls should be used when a country's currency is not overvalued, the economy is overheating and there is no possibility to tighten fiscal policy.

However, if an exchange rate is undervalued, or if there are other "necessary policy adjustments" such as addressing procyclicality from fiscal policy, then it advises against imposing restrictions.

The aftermath of the financial crisis has seen emerging economies using a range of measures to ward off large-scale capital inflows, which look to benefit from the higher interest rates in fast-growing economies such as China and Brazil.

Measures that have been used to combat these inflows include allowing currency appreciation and purchasing of foreign exchange.

The IMF also recommends methods such as lowering policy rates or tightening fiscal policy, akin to attempts to lower inflationary pressures.

Endorsed late on Tuesday, the framework advises against giving precedence to capital controls that discriminate on the basis of residency, with the design of these controls instead to be considered on country-specific circumstances and effectiveness.