Evaluating the Implementation of the IMF’s Institutional View on Capital Flows

The onset of the COVID-19 pandemic triggered a sudden reversal in global capital flows, compounding the fallout from the pandemic for emerging market and developing economies. Between mid-January and mid-March 2020 alone, the Organization for Economic Co-operation and Development (OECD) estimated outflows from these countries at $103 billion. The consequences of such sudden stops or flight of capital can be severe, including exchange rate depreciation, increasing debt levels, tighter financial conditions, a decline in asset prices, falling investment and a reduction in aggregate demand.

Now, as countries work to recover and rebuild from the pandemic, there has been a reemergence of the discussion of capital controls as an effective tool for a country to establish financial stability. The International Monetary Fund (IMF) is also revisiting its Institutional View (IV) on capital flows in mid-March 2022.

A new working paper from Luma Ramos, Lara Merling and Kevin P. Gallagher evaluates IMF surveillance documents before and after the IV was operationalized to assess its impact on the frequency of country-level discussions and advice on measures related to CFMs.

Using a textual analysis of Article IV assessments between 2004 and 2019, the authors constructed an index on the IMF and Capital Flow Management – the CFM Index – comparing the attention received by these issues before and after the implementation of the IV. The results of the CFM Index were then compared against a benchmark that established to measure capital flow volatility, with results shown in the interactive figures below:

Ultimately, the authors found that advice on CFMs was mostly consistent with the IV, though there is still a large discrepancy among members when it comes to whether the merits of CFMs are discussed at all within individual member states. Many countries that face significant capital flow volatility risks were systematically ignored, with little or no discussion around policy tools available to address that volatility.

As the IMF prepares an update of its overall guidance on CFMs, the authors recommend introducing clear criteria to ensure the IV is mainstreamed by IMF staff and evenly implemented across all countries.