Cross-border Capital Flows Research Articles

Exchange Rates and Capital Flows

Floating exchange rates were supposed to automatically restore the external balance of an economy, leaving monetary policy free to pursue domestic objectives, without the external constraint. There was also a promise that floating exchange rates would not, in fact, fluctuate much and would be rather stable thanks to speculation. Forty years of experience with floating rates do not support such claims. Floating exchange rates have proved to be volatile, have allowed large and persistent current account imbalances, have not relieved monetary policy form the external constraint and often, made it more difficult for monetary policy to achieve domestic policy objectives. What floating exchange rates made possible was the across-the-board liberalization of cross-border capital flows which, growing ever higher relative to real economy transactions, have turned the exchange rate, out of a policy instrument, into a mere by-product of the interplay of speculative forces.

Taper Tantrum and Emerging Equity Market Slumps

In the postglobal financial crisis period, the central banks of the advanced economies pursued unconventional monetary policies, such as the United States (US) Federal Reserve’s quantitative easing (QE). Those policies and their unwinding may significantly affect cross-border capital flows and thus destabilize the financial systems of emerging markets. For example, emerging markets experienced substantial financial instability during the taper tantrum triggered by the US Federal Reserve Chairman Ben Bernanke’s May 2013 announcement of the potential unwinding of QE. In this paper, we examine the spillovers from the taper tantrum on emerging markets more rigorously by using econometric analysis to empirically assess the effect on equity markets in emerging markets. Our central finding that virtually all emerging market equity markets were affected by the taper tantrum highlights the need for emerging market authorities to remain vigilant about the effects of advanced economy monetary policies on their financial stability.

Совет по финансовой стабильности: на пути к институционализации?

The article deals with the evolution of the Financial Stability Board (FSB) into a full-scale and sound authority of international banking regulation. Founded in 1999 as the Financial Stability Forum, the FSB has become an international body in 2009 overseeing the international financial regulation reform, also known as Basel III. Nonetheless, FSB’s responsibilities and competence are still limited to the annual determination of global systemically important banks (G-SIBs) and the development of the reform strategies for G-20 consideration. FSB has already proved to be a credible coordinator of Basel III implementation. Its initiatives on effective resolution strategies and total loss absorbing capacity for G-SIBs not only notably contributed to the set of regulatory tools and techniques aimed at minimization of systemic risks and enhancement of stress resilience of the banking industry but also designed approaches to mitigate the threat of “too big to fail” banks for the national economy at large. However, new regulatory paradigm requires principally new metrics to measure macro- and micro-level risks. Yet synchronization of the regulatory reform at the national and supranational levels stands beyond the accepted scope of synergetic effect of the reform. This means that FSB’s organizational status makes it less capable to be in line with financial sector dynamics, its growing interconnectedness and complicating infrastructure, and rapidly changing economic environment. Under these circumstances regulatory transformation lacks mechanism that would overcome fallouts of regulatory arbitrage as well as risks of shadow banking. Reform inconsistency may spur perilous effect of regulatory “glocalization” in that national regulatory regimes may stop abiding by most of the Basel III principles and standards, which may ultimately ruin sense, logic, and continuum of the reform. Shortage of factors that calibrate consistency and continuity of regulatory reform diminishes FSB’s involvement into it. FSB’s efforts in promoting basics of reform synchronization between national and international realms are weakened by fragmentation of the financial markets as well as by different adaptive abilities of financial institutions to the new regulatory order. On the other side, single-principles-centered quantitative and qualitative platforms of banking regulation are among the imminent traits of the global financial sector. The mentioned conflicts put on the agenda the inevitability of a higher international status of the FSB as a powerhouse of a single regulatory concept aiming at global financial stability. Driven by that mission FSB is urged to become an independent international institute to administer closer collaboration among national regulators as a regulatory information hub. This will decisively complement its kit of existing instruments in attaining more balanced reform implementation and will ensure synergetic effect when applying regulatory actions into risk identification and risk management as well as resolution and recovery of G-SIBs. Acknowledgements. The research was supported by a grant of the RFH, project № 15-02-00669/15 “Development of the conceptual framework for cross-border capital flow amid escalation of geopolitical risks for the Russian Federation”.

Perceptions of Czech Professional Accountants on Current Trends in Reporting

International convergence of accounting standards is not a new idea. The concept of convergence first arose in the late 1950s in response to post World War II economic integration and related increases in cross-border capital flows. Initial efforts focused on harmonization, or reducing differences among accounting principles used inmajor capital markets around the world. By the 1990s, the notion of harmonization was replaced by the concept of convergence, or the development of a single set of high-quality, international accounting standards that would be used in all major capital markets.The Czech Republic is representative of emerging economies from the central and eastern European (CEE) area with the traditional linkage of the accounting system to the tax system and application of the prudence principle in accounting. That is why fair value is not as widely applied under international financial reporting standards (IFRS) practices. The main objective of this research is to measure the perception of the professional accountants on current trends in international accounting and how it might influence local Czech accounting practices. For this purpose, a questionnaire was prepared. This survey was conducted among selected Czech companies in spring 2013. The research was targeting companies with clear audit opinions. The questionnaire was sent to 4,082 companies. The return rate was 9.1 % and we analyzed 371 valid questionnaires. The analytical part of this survey, conducted online via Google forms, was divided into two Int Adv Econ Res (2015) 21:135–136 DOI 10.1007/s11294-014-9507-7

Minsky, Monetary Policy and Mint Street: Challenges for the Art of Monetary Policymaking in Emerging Economies

This paper examines the emerging challenges to the art of monetary policymaking using the case study of the Reserve Bank of India (RBI) in light of developments in the Indian economy during the last decade (2003-04 to 2013-14). The paper uses Hyman P. Minsky’s financial instability hypothesis as the conceptual framework for evaluating the endogenous nature of financial instability and its potential impact on monetary policymaking, and addresses the need to pursue regulatory policy as a tool that is complementary to monetary policy in light of the agenda of reforms put forward by Minsky. It further reviews the extensions to the Minskyan hypothesis in the areas of setting fiscal policy, managing cross-border capital flows, and developing financial institutional infrastructure. The lessons learned from the interplay of policy choices in these areas and their impact on monetary policymaking at the RBI are presented.

Growing Global Needs for ACU-Denominated Reserve Assets

In the wake of the Asian crisis in 1997, policy efforts have been largely devoted to installing various safety devices in the region, e.g. FX reserves and other swap arrangements of CMIM and extra backup with IMF liquidity facilities. Despite comprehensive progresses in regional monetary cooperation, they have proven less than effective in securing financial stability in the region as witnessed by the global financial crisis in 2008. Given the newly raised insurance motives in the region after the GFC, we have been looking for the underlying causes of volatile liquidity situation to seek better ways to enhance regional financial stability. This paper finds that the missing link in previous efforts has been the lack of valid reserve assets. Excess reliance on dollar assets in the form of increased FX reserves has revealed many problems. Going forward, a viable remedy would be a provision of a new reserve asset that represents the growing role of Asia. Introducing a new category of reserve assets in the international monetary system would not only complement the current monetary cooperation in the region but also enhance the global financial stability. This is because of its usefulness to alleviate the excess dollar dominance as a sole reserve currency and its eroding confidence due to tectonic changes in economic landscape. Without addressing the issue, even the best efforts in monetary and financial cooperation would not help ensure stability in the region and the world as repeatedly dictated by the reality. Specifically, introduction of ACU-type of reserve assets would serve to narrow the widening gap between demand and supply of safe financial assets. It would contribute to normalizing cross-border capital flows and sustaining stability of the existing reserve assets. Regional monetary and financial cooperation need to be predicated on this crucial effort to make sustained improvements in global rebalancing and moderate cross-border capital flows for global financial stability. Future efforts in regional monetary cooperation need to take this into account to realize the potential for supplying a new regionally-based reserve asset to remain time-consistent.

The Economics of Regulating Cross-border Finance: Two New Views

For much of the 20th century the dominant view in macroeconomics was that cross-border finance needed to be regulated in order to balance the ‘impossible trinity’ first sketched by John Maynard Keynes in his two books on monetary theory. The dominant view in development economics during the same period was that cross-border capital flows need to be regulated for similar reasons but also to mobilize domestic resources for economic development. The view that capital mobility was something to be constrained fell out of favor in mainstream economics by the 1980s and 1990s. The experience of numerous financial crises in the past 20 years has spawned new economic theories that reintroduce the notion that cross-border finance can cause financial instability. One strand of new theory in this realm picks up from Ragnar Nurkse, Hyman Minsky, and others, and has become popular in many emerging market capitals and in the United Nations system. Another strand of new theory comes from modern welfare economics and is gaining ground in mainstream economics, central banks, and the Bretton Woods institutions. This paper examines these new breakthroughs and traces them to their origins in economic thought. Coupled with new econometric evidence on the efficacy of capital account regulation, the regulation of capital flows is justified now more than ever.

International Evidence on the Interaction between Cross-Border Capital Flows and Domestic Credit Growth

Uluslararası sermaye akımları ve makro-finansal istikrar arasındaki ilişki önemli ve hala kesin sonuç bulmamış bir tartışma konusudur. Bu çalışma, uluslararası sermaye akımları ve yurtiçi kredi büyümesine ilişkin ampirik bulgular sunmak suretiyle söz konusu literatüre katkı sağlamaktadır. Kullanılan veri seti gelişmiş ve gelişmekte olan 101 ülkeden oluşmaktadır. Referans model olarak sabit etki modeli kullanılmış ve en son teorik bulgularla (Bruno ve Shin 2014) uyumlu olarak, bu iki değişken arasında istatistiksel olarak anlamlı ve pozitif bir ilişki bulunmuştur. Ayrıca bu ilişkinin, Türkiye’nin de içinde bulunduğu üst-orta gelir grubu ülkelerde, alt-orta ve yüksek gelir grubu ülkelere kıyasla daha belirgin olduğu görülmüştür. Temel bulgular farklı ekonometrik modeller ve alternatif değişkenler kullanıldığında değişmemiştir.

The spatial characteristics of global property investment in Seoul: A case study of the office market

As more and more countries liberalise their financial systems, capital has become increasingly mobile. These emerging capital flows and the accumulation of capital are mainly embodied in foreign direct investment. A new component is global property investment which is creating an internationalised office market and distinctive spatial patterns in global cities.Despite the increasing volume of foreign-owned property, as well as the popularity of the facilitating policies for cross-border capital flows into real estate, in both developed and developing countries, there has been little attention to the spatial characteristics of global property investment (GPI). Massive cross-border capital flows, associated with the decision of international property investors, will result in locally intensive changes. Understanding these changes will allow advice to refine and enhance sectoral and urban policy. The primary purpose of this study is, therefore, to explore the characteristics of GPI via the magnitude of the flows, global investors’ location choice, links between property markets and office space markets, and government response to these outcomes. Seoul is used as case study because there is a fast growing foreign-owned office property sector along with city's growing integration with the global economy.

FISCAL POLICY PROBLEMS UNDER CONDITIONS OF FINANCIAL LIBERALIZATION

The article under the title deals with the difficulties in pursuing national fiscal policy in conditions of international financial liberalization. The author analyzes the nature of liberalization of international capital flows and its positive and negative consequences for the economies of the countries which participate in global capital movement. The author especially highlights the fact that international financial liberalization often leads to economic crises and what is even more important to their rapid spread between countries due to their growing financial interdependence. The author distinguishes two groups of fiscal policy problems in conditions of international financial liberalization. The first group includes problems arising due to quick spread of the crises due to eliminating restrictions on crossborder capital flows. These are reduction in taxes and at the same time increase in budget spending, which often happens unexpectedly and substantially impedes fiscal policy. To illustrate these points the author refers to the statistics on Spain, the USA and the OECD as a whole. Moreover countries face another range of problems regardless of the business cycle phase. In the short term it is the necessity of large scale structural economic reforms to achieve the required level of financial liberalization, which often is a heavy burden on the state budget. In the long term the attention is paid to the problem of tax competition between countries, which affects the instruments of fiscal policy. The author notes that the negative consequences of global financial liberalization are relevant not only for recipient countries but for donor countries as well and emphasizes such a burning issue as "capital flight".

The Economic Substance Doctrine and China’s Power to Tax Income from Indirect Equity Transfers by Non-Resident Enterprises

The indirect transfer of equity in a Chinese resident corporation by a foreign investor that is a non-resident enterprise through transferring shares in an intermediate holding company is a common technique used in cross-border capital flows. According to the Corporate Income Tax Law of China, the place where a company is located (i.e., registered) determines the location of transfers of equity in that company and which country has the power to tax that transfer, which also gives rise to the problem of the legal scope of this taxing power. The State Administration of Taxation has issued relevant documents to establish the economic substance doctrine, adopting a “look-through approach” to negate the existence of an intermediate holding company and accordingly claim jurisdiction to tax in order to deal with the growing problem of base erosion and profit shifting. The taxing power on indirect transfers does not apply, however, to a transfer which has reasonable commercial purposes or meets the special provisions in tax treaties. China should develop rules through legislation to clarify the specific circumstances relating to such “reasonable commercial purposes”, to provide specific exemption from tax for cross-border internal restructuring-related indirect equity transfers, to introduce an advance ruling system, and to perfect the mechanisms for monitoring revenue sources.

Why was Asia Resilient? Lessons from the Past and for the Future

Asia proved to be remarkably resilient in the face of the global financial crisis, but why was its output performance stronger than that of other regions? The paper shows that better initial conditions — in the form of lower external and financial vulnerabilities — contributed significantly to Asia's resilience. Key pre-crisis factors included moderate credit expansion, reliance on deposit funding, enhanced bank asset quality, reduced external financing, and improved current accounts. These improvements reflected the lessons from the Asian financial crisis in the late 1990s, which helped to reshape both public policies and private sector behavior. Looking ahead, Asia is in the process of adjusting to more volatile external conditions and higher risk premiums. By drawing the right lessons from its pre-crisis experiences, Asia's economies will be better equipped to address new risks associated with increased cross-border capital flows and greater integration with the rest of the world.

From control by capital to control of capital: Iceland's boom and bust, and the IMF's unorthodox rescue package

ABSTRACTFor decades past the IMF has been a byword for economic orthodoxy, which included disapproval of policy limits on cross-border capital flows. But in 2012 it announced a new “institutional view” giving more scope for capital flow management and in effect restricting the rights of capital owners. The Fund's program in Iceland after the October 2008 crash helped to pave the way; it was the first time the Fund had endorsed capital controls in a developed country. The essay describes Iceland's boom and bust, and how the government and IMF tried to manage the crisis. With IMF support, the government implemented capital outflow controls, initially as an emergency response and then as a longer-term stabilization measure. The control regime evolved in a complicated “game”, sometimes referred to in public debate as “the battle of Iceland”, between the central bank implementing a professionally-led capital account liberalization strategy versus political parties seeking to turn the controls to their advantage. From this political economy perspective we explain why the “temporary” capital controls remain in place more than five years on. At the end we draw some broad lessons from the Iceland case for the financial booms and busts to come.

Financial Globalization in Emerging Economies: Much Ado about Nothing?

Financial Globalization in Emerging Economies:Much Ado about Nothing? Eduardo Levy Yeyati (bio) and Tomas Williams (bio) Financial globalization (FG), understood as the deepening of cross-border capital flows and asset holdings, has become increasingly relevant for the developing world for a number of reasons, including the consequences of its changing composition on countries’ balance sheets, its role in the transmission of global financial shocks, its benefits in terms of financial development, international risk, and business cycle smoothing, and the implication of all of the above for macroeconomic and prudential policies. In this paper, we focus on these issues from an empirical perspective, building on, updating, and refocusing the existing literature to characterize the evolution and implications of financial globalization in emerging economies. As conventional wisdom has it, the globalization process has been growing steadily since the mid-1980s, particularly in developing countries (Kose and others 2010) and has accelerated since the turn of this century, with a dramatic increase in cross-border portfolio flows as a fraction of global wealth (Gagnon and Karolyi 2010). However, this pattern depends on the measure of FG, usually proxied in the literature by the average of cross-border assets and liabilities over GDP (FG-to-GDP ratios). As we show in the first part of the paper, a more natural normalization of foreign holdings by host market size (to control for financial market deepening and spurious relative price [End Page 91] effects) reveals a more stable FG pattern over this period.1 In turn, normalizing foreign portfolio asset holdings by total portfolio holdings by residents shows that, despite the growing financial globalization ratios, international portfolio diversification in the emerging world is still remarkably low and has remained stable or declined. The second part of the paper is devoted to the costs and benefits of FG in emerging economies, an elusive subject that has produced conflicting results in the literature. Financial globalization has been associated with the deepening of local markets (in terms of credit to the private sector and equity market capitalization) with varied success: the literature has found a positive influence from market depth to FG (Lane and Milesi-Ferretti, 2008; Kose and others 2010) and vice versa (Baltagi, Demetriades, and Law 2009). Identification of causality is further complicated by the choice of the time window: as Mishkin (2007) notes, while entry of foreign capital and institutions may improve domestic financial markets’ conditions through greater competition and liquidity, financial crises could end up blurring this link. We revisit the existing evidence and analyze it through the lens of new proposed metrics that, in our view, are better suited to analyze the question. We find that there is indeed a positive effect that works through market-specific channels (for example, foreign equity liabilities, associated with foreign participation, help deepen local equity markets rather than local financial markets as a whole). In turn, empirical evidence on the link between financial globalization and consumption smoothing has shown mixed results at best. On one hand, Giannone and Reichlin (2006) report an increase in risk sharing for European countries in the early 1990s, when FG advanced significantly (although their result may be dependent on the specific subsamples used), and Artis and Hoffmann (2006) argue that financial globalization improves risk sharing in the long term. On the other hand, Bai and Zhang (2012) analyze a two-period sample, 1973–85 and 1986–98, for advanced and developing economies and show that although according to their measure financial globalization doubles from period to period, there is no substantial improvement in international [End Page 92] risk sharing. In the same vein, Kose, Prasad, and Terrones (2007) discuss the theoretical advantages of financial globalization in terms of international risk sharing as a way to hedge consumption against domestic income shocks, but they find that only advanced economies have reaped those benefits so far. We examine the risk-sharing benefits of FG from a critical perspective. We test the evolution of risk sharing, based on the output sensitivity of consumption in emerging markets (“consumption betas,” where both output and consumption are computed relative to the world’s) and find neither improvement in nor link with conventional FG-to-GDP ratios. We argue...

Positive and Negative Impact of FDI (Foreign Direct Investment) on a Country’s Economic Development

Over the past three decades, the world has witnessed massive growth in Financial markets both in terms of their scale and scope. The global value of financial assets including equities, government and private debt, and bank deposits increased from mere US$ 12 trillion during 1980 to US$ 64 trillion in 1995, and further, it has grown to US$ 140 trillion by 2005. The global financial assets have grown more than ten-fold within a quarter-century. The growth of financial assets has far outstripped the global GDP growth which has increased from US$ 10.1 trillion to US$ 44.5 over this period. The increase in cross-border financial activity has been increased even more unprecedentedly for the last few decades. Worldwide cross-border capital flows –which include foreign purchases of equity and debt securities, cross-border lending, and foreign direct investment (FDI)-have grown at an average annual rate of 10.7% since 1990 and reached a level exceeding US$ 6 trillion in 2005 (Farrell cited in anon 2011). As Escaleras (2011) argued that in order to appreciate the dynamism of FDI it is important to recognize that total net foreign direct investment inflows rose from about $10 billion in 1975 to an astonishing $532 billion in 2004. Natural disasters around the globe also increased dramatically during the past half-century. Exhibit-3 depicts the growth in major, destructive natural disasters such as earthquakes, floods, volcanoes, landslides, and windstorms for the period 1935-2004 (Escaleras 2011). In this paper, we will explore the mechanism of Foreign Direct Investment, how it is contributing towards the development of a country’s economy, and moreover improving the standard of living of the particular countries. We will also examine why FDI is important for the developing world for eliminating poverty. Also, we will critically analyze the negative side of FDI and its negative influences on a country’s economy and cultural aspects. Finally, we will examine and correlate the increase in natural disasters and the FDI flow of the respective countries.

Trade Policy and International Finance in the Bretton Woods Era: a Doctrinal Perspective with Reference to Australia and New Zealand

The Bretton Woods system embodied a self-imposed liquidity constraint. Trade policy was subordinated to the maintenance of official foreign reserves used to defend fixed exchange rates. In Australia and New Zealand, reserves were considered a form of national self-insurance against the instability of export receipts and the liquidity problem was often referred to as the ‘foreign exchange constraint’ – as if it were exogenously given rather than the result of certain policies, and it reinforced inward-looking trade policies. International financial arrangements, including severe restrictions on cross-border capital flows, delimited thought and action in connection with Australian and New Zealand trade policy.

Regulating Capital Flows at Both Ends: Does it Work?

This paper examines whether cross-border capital flows can be regulated by imposing capital account restrictions (CARs) in both source and recipient countries, as was originally advocated by John Maynard Keynes and Harry Dexter White. To this end, we use data on bilateral cross-border bank flows from 31 source to 76 recipient (advanced and emerging market) countries over 1995–2012, and combine this information with a new and comprehensive dataset on various outflow and inflow related capital controls and prudential measures in these countries. Our findings suggest that CARs at either end can significantly influence the volume of cross-border bank flows, with restrictions at both ends associated with a larger reduction in flows. We also find evidence of cross-border spillovers whereby inflow restrictions imposed by countries are associated with larger flows to other countries. These findings suggest a useful scope for policy coordination between source and recipient countries, as well as among recipient countries, to better manage potentially disruptive flows.

Why Was Asia Resilient? Lessons from the Past and for the Future

Asia proved to be remarkably resilient in the face of the global financial crisis, but why was its output performance stronger than that of other regions? The paper shows that better initial conditions—in the form of lower external and financial vulnerabilities—contributed significantly to Asia’s resilience. Key pre-crisis factors included moderate credit expansion, reliance on deposit funding, enhanced bank asset quality, reduced external financing, and improved current accounts. These improvements reflected the lessons from the Asian financial crisis in the late 1990s, which helped reshape both public policies and private sector behavior. For example, several countries stepped up their use of macroprudential policies, well before they were recognized as an essential component of the financial stability toolkit. They also overhauled financial regulations and strengthened oversight of financial institutions, which helped reduce risk-taking by households and firms before the global financial crisis. Looking ahead, Asia is in the process of adjusting to more volatile external conditions and higher risk premiums. By drawing the right lessons from its pre-crisis experiences, Asia’s economies will be better equipped to address new risks associated with increased cross-border capital flows and greater integration with the rest of the world.

The Capital Effects of Information Voids in Emerging Markets

The absence of local public information about a host country’s investment environment is an institutional void that plagues foreign investors in emerging markets, yet little existing research analyzes the precise nature of that information void or the heterogeneity in foreign investors’ strategies to manage the lack of publicly-available investment-relevant information. This paper presents a 2x2 typology of information (local/global and public/private) to clarify the concept of information, and disaggregates foreign investors into what is commonly understood as the universe of private cross-border capital flows: direct investment (FDI), portfolio investment (FPI), and bank debt. We develop theory to predict variation in foreign investors’ sensitivity to local public information voids, arguing that banks are least sensitive to information voids; FPI is moderately sensitive; and FDI is most sensitive. Using novel time-series cross-sectional data on local public information and capital flows to the 30 largest emerging markets from 1978 to 2012, we find preliminary evidence of the relative sensitivity of different investors to widening information voids. ⇤Author order is alphabetical by convention. All three authors contributed to the paper equally. Corresponding author available at 55 Colchester Avenue, Burlington, VT, 05405, +1.802.656.3464 (o), +1.802.656.8279 (f), allison.kingsley@uvm.edu. †Special thanks to Institute of International Finance (IIF) and the Credendo Group for data use and permissions; three anonymous reviewers and our editor Mona Makhjia for valuble comments; participants at Harvard Business School / JIBS Paper Development Workshop (2015), International Political Economy Society Annual Meeting (2013), and University of Southern California’s Center for International Studies Faculty Workshop (2014) for helpful feedback. The conclusions of this paper are the responsibility of the authors.

Does the policy trilemma still hold? Fresh evidence and its implications

Economic success of any nation intrinsically hinges on the tradeoff between external policy choices and their internal consequences. An enduring challenge that countries confront is the ‘trilemma’ of choices between three desirable, yet jointly unattainable objectives of maintaining a fixed exchange rate regime, unfettered cross-border capital flows and monetary policy independence. This study examines the extent of monetary autonomy for over 130 nations spanning the period 1999–2011. Using both pooled cross-sectional as well as time series analyses I find more loss of monetary sovereignty for fixed regimes than non-fixed ones, supporting the trilemma's predictions. However, I do note this difference is only marginal and several floaters exhibit ‘fear of floating’ behaviour allowing sufficient transmission of foreign interest rates. Finally, I examine the macroeconomic consequences of the three tenets of the trilemma. I find higher monetary independence, greater capital openness as well as greater regime flexibility to promote economic stability.