Nicholas Sarkozy

Kevin P. Gallagher, Stephany Griffith-Jones, and José Antonio Ocampo

This month the International Monetary Fund (IMF) can make history.  The IMF is set to officially change its view on the regulation of cross-border finance.  Preliminary work released by the IMF exhibits diligent research and deep soul searching, but falls short of being a comprehensive view on how and when to regulate capital flows.  There is still time for the IMF to further sharpen its view.

In recent decades cross-border capital flows have increased massively; international asset positions now outstrip global economic output.  Direct investment is essential for growth but some forms of international financial flows (such as short-term debt, carry trade, and related derivatives) have proven to be usually de-stabilizing. Even long-term capital flows are highly, even increasingly pro-cyclical, as IMF research has shown.