Multilateral Considerations

Abstract

This chapter discusses international spillovers, the multilateral impact of individual countries' policies, and the scope for international policy cooperation. Theory and empirics suggests that recipient countries would benefit from coordinating their policy responses to capital inflows. Specifically, because of spillovers of one country's measures on another, uncoordinated responses might result in barriers that—abstracting from terms of trade effects—are inefficiently high, reducing both global and recipient-country welfare. Theory also suggests that, under plausible conditions, it would be globally efficient if source and recipient countries could act “at both ends” in managing cross-border capital flows. For the recipient country, there would be a clear benefit if part of the distortive cost of capital controls could be shifted to the source country. Even though source countries might incur some economic or administrative cost in managing outflows, they would benefit from the terms of trade improvement.