Debt burdens endanger world financial stability, IMF warns (3)

08:44, April 21, 2010      

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Capital control

Emerging markets, which have outpaced advanced economies in recovery, face stability challenges from this multi-speed global recovery, IMF warned.

Prospects for strong growth, appreciating currencies, and rising asset prices are pulling portfolio capital flows into Asia Pacific (excluding Japan) and Latin American countries, the report showed.

"Although the benefits of capital inflows are manifold, sudden inflow surges may lead to inflation and asset price bubbles," it said.

To tackle the problems, a pragmatic approach using a combination of macroeconomic and prudential financial policies is advisable for emerging countries, IMF said.

The report said that global liquidity pushes up local equity prices and lowers real interest rates in receiving countries, typically by more than domestic liquidity, and that more flexible exchange rates can dampen such effects.

In addition to a mix of macroeconomic policies, including a more flexible exchange rate when conditions permit, capital controls can lengthen the maturity of some types of inflows, and may also be adopted by receiving economies to respond to capital inflow, IMF said.

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