Managing Capital Accounts in Emerging Markets: Lessons from the Global Financial Crisis

The global financial crisis forcefully highlighted the importance of curbing the impact of large and volatile capital inflows on growth and financial stability in developing countries. It led the IMF to reconsider its long-standing rejection of capital controls. Yet its new ‘macroeconomic policy first’ approach has to be reconciled with the hybrid nature of banking activity and its role in transmitting global shocks. A consideration of dominant actors and strategies of intermediating capital inflows offers distinct policy options, ranging from carefully designed central bank strategies to institutional changes that realign bank incentives towards longer horizons and sustainable growth models.