Fernando J. Cardim de Carvalho: Macroeconomic policy with open capital accounts

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Macroeconomic policy with open capital accounts

21 pp.
3.60 EUR
(March 2009)

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"Macroeconomic policy with open capital accounts” is the subject and the title of the chapter by Fernando J. Cardim de Carvalho. The chapter starts with the observation that for most countries, opening the capital account of the balance of payments reduces domestic autonomy in the choice of goals and even of instruments of monetary policy. Capital account liberalisation increases international financial integration and this means precisely that national financial transactions become part of a bigger market, the global market. However, it is usually proposed that flexible exchange rates should obviate the problem, allowing countries to recover their power to decide on domestic interest rates. It is a central goal of this chapter, however, to argue that the orthodox view that floating exchange rates are efficient alternatives to capital controls, in order to obtain at least partial, but still significant, insulation of domestic policymaking, grossly underestimates the loss of domestic autonomy resulting from opening the capital account. The author encounters several reasons for this: Firstly, financial flows are not similar in behaviour to trade flows. Secondly, the loss of policy-making autonomy is not limited to monetary policy. Thirdly, what flexible exchange rates do is just to shift part of the adjustment burden from the interest rate to the exchange rate. Finally, market discipline in the case of the financial system is very defective and cannot be trusted to exercise a positive influence on policymaking.

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