Why the IMF Changed Its Views on Capital Controls

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

So Tracy, evolution of economic thought is a big topic for us, especially this year, a lot of discussion about monetary policy, fiscal policy, one of our recurring themes, no doubt.

Tracy Alloway (0:33)

Yeah, I mean, it feels like a lot of these conversations had begun even before 2020, but this year is kind of the one that makes everyone start taking them, or at least talking about them seriously. So things like modern monetary theory, once considered very, very heterodox, I mean, now you see certain US politicians talking about it, the idea of a greater role for fiscal policy alongside money policy.

There are a lot of standard thoughts that are being overturned, or at the beginning of being overturned, maybe.

Joe Weisenthal (1:08)

Right. Some stage of evolution. We haven't really, I mean, we've done a little bit, but we haven't really taken this sort of theme of evolution, however, within the context of, say, emerging markets, or we haven't really done as much on it. We've done a little actually, but not that much yet.

Tracy Alloway (1:26)

Yeah. So emerging markets this year were pretty interesting, clearly under a lot of stress because these are the countries that are dealing with a huge caseload of the virus, the coronavirus, and also dealing with the economic fallout of everything that's going on in the rest of the world. So it feels like they're sort of getting this double whammy of maybe not having as great health systems as a lot of the developed world, but still having to deal with the economic impacts. So, you know, back in March, remember, like, EM looked like it was very much in trouble.

Joe Weisenthal (2:03)

You know, I really do think, and it's not exactly what we're going to be talking about today, but I do think one of the themes from 2020 that's going to be interesting in retrospect and with pretty important implications is whether various EMs have more policy flexibility than previously appreciated, whether it's their ability to do quantitative easing, whether it's their ability to run fiscal deficits. It's possible that after 2020, people might start to think that some EMs might have more space to engage in countercyclical policy than previously appreciated.

Tracy Alloway (2:37)

Oh, absolutely. And we're already sort of seeing that because Indonesia, I mean, who would have thought a few years ago that Indonesia would be the first central bank to do direct financing?

And in 2020, that's entirely possible. So we are seeing some emerging markets.

Joe Weisenthal (2:51)

And the world didn't end.

Tracy Alloway (2:53)

Yeah, so we are seeing some emerging markets experimenting with new types of policy.

Joe Weisenthal (2:59)

Another big question, of course, and this is something that is a constant theme in EM discussions relates to the control of the capital account, limiting hot money or money coming in, coming out.

The degree to which EMs should keep a tight leash on capital inflows and outflows is something that always gets debated. And there's always sort of a rethinking about what is the appropriate degree to which such things should be tightly controlled.

Tracy Alloway (3:36)

Yeah, and I think, I mean, for years and years and years, it was pretty clear that the international political system, I guess, had a bias against capital controls.

They wanted liberalization of the current account. They wanted money to flow freely between countries.

And we've seen at various points in time that that's not always in the best interest of the country itself. So, for instance, if you're an emerging market somewhere and suddenly you get this influx of hot money from abroad because people are looking for yield and they pour it all into your housing market or something like that, that might not actually be what you want at that particular moment in time in overheated housing market. So that's been an ongoing debate. And I think you're right. We're starting to see some discussion of it. 2020, again, provides another sort of catalyst to look into this topic.

Joe Weisenthal (4:30)

Exactly right. Well, we have two very great guests. I'm excited to chat with them about this topic. We're gonna be speaking with Prakash Loungani. He's the Assistant Director and Senior Personnel Manager in the IMF's Independent Evaluation Office, as well as Sriram Balasubramanian, a Senior Research Officer at the IEO and IMF. Excited about talking to both of them on this topic. They both recently done work on this.

Prakash, thank you very much for joining us.

Prakash Loungani (4:58)

Thanks Joe. It's great to be on the show with you and Tracy. I've really enjoyed listening to your podcast.