Dealing with Exchange Rate Issues: Reserves or Capital Controls?

Abstract

Developing countries’ positions regarding the capital account have changed significantly in the last decade. After a period of wide liberalisation, country authorities have now been constantly increasing their policy toolkit with new instruments to intervene in the capital account and limit the consequences of excessively volatile capital flows. This change is a response to the increasing size and volatility of capital flows, which is associated with the process of financialisation that has been taking place in recent decades, where financial actors and motives have assumed more important roles. The increasing magnitude and volatility of finance-related flows are clearly shown in Figure 1, which presents the net financial flows excluding Foreign Direct Investment (FDI) received by developing and emerging countries since 1990. (…)