The IMF, Capital Controls And Capital-Flow Volatility

News that a large Swiss bank will begin charging business clients a negative interest rate for holding Swiss franc deposits has gotten some observers suggesting this is a form of capital control. Usually 'capital control' refers to sovereign action. In the late 1970s, both Germany and Switzerland did, in fact, impose negative rates on foreign deposits to discourage speculation in their currencies.

The IMF Two-Step
However, there is a real capital control story today and it's not in Switzerland. Instead, it is the IMF, that bastion of neo-liberalism, which is continuing to modify its stance. Recall that in the recent past it has come out in favor of macro prudential policies and has diluted its support for austerity by recognizing that the fiscal multiplier is significantly greater than it previously projected, partly as a function of the near-zero interest rate environment.

Today, a staff paper -- written in a personal rather than official capacity -- accepted the use of direct controls to reduce the volatility of capital flows. It did, however, advocate that such controls be transparent, targeted and generally temporary. Of course, the IMF has not abandoned its ideology completely and recognizes that capital mobility is generally beneficial. However, it acknowledges that hot money flows could destabilize economies in which the capital markets are under-developed.

The Financial Times notes that some argue that the IMF should be more critical of the super-loose monetary policy in rich countries for encouraging volatile flows into emerging markets, without acknowledging that capital flows into emerging markets has actually fallen over the past couple of years, despite the monetary stance of the "rich" (i.e, highly indebted) countries.

What's Driving Capital?
In addition, there are a number of factors that drive flows into developing countries, and the money policy of the high income countries is one, but why pretend it is mono-causal. Strong growth profiles, high interest rates, strong returns on capital and, of course, under-valued currencies also attract capital flows to some developing countries. Lastly, when Brazilian companies, for example, issue bonds abroad in foreign currencies and/or sell shares abroad and repatriate the funds, the resulting bid for the local currency does not fit into the "currency war" narrative that many seem so enamored with.

In any event, the IMF continues to evolve away from the Washington Consensus and push for capital account liberalization in all places and at all times. It is a more nuanced stance.