Taming capital flows

The argument of this paper is that growing capital mobility is unavoidable. Domestic financial liberalization and the revolution in information and co mmunications technologies make it much more difficult to stop capital flows at the border. Effective controls will therefore have to become increasing ly comprehensive, onerous, and distortionary. The issue is therefore how to cope with the reality of high capital mobility and to manage the transitio n. This means not freeing capital flows before substantial progress has bee n made in liberalizing domestic financial markets and strengthening financi al supervision. It means liberalizing foreign direct investment first, acce ss to stock and bond markets second, and offshore bank-funding last. It mea ns putting in place exchange rate, monetary and fiscal policies that do not destabilize the capital account. It means reforming monetary and fiscal in stitutions to assure the markets of the capacity to deliver desirable monet ary and fiscal outcomes. (C) 2000 Elsevier Science Ltd. Ail rights reserved .