WASHINGTON (MNI) – The following is the second section of excerpts
from the text of Federal Reserve Vice Chair Janet Yellen’s remarks on
“Reaping the Full Benefits of Financial Openness” prepared for the Bank
of Finland 200th Anniversary Conference in Helsinki Friday:
But studies of these controls, including by staff members at the
Central Bank of Chile itself, suggest that the success of the Chilean
controls was mixed. The controls did shift the composition of flows away
from assets with shorter maturities, but the effects on the volume of
flows and the exchange rate — two key goals of the controls — are less
clear. Some evidence also suggests that the controls harmed small firms
in Chile by reducing the availability of financing and raising interest
rates.
—
Finally, capital controls have global implications, as restricting
financial openness can impede current account adjustment and thus hinder
the world economy from reaching a more balanced equilibrium. Indeed, as
I have noted in an earlier speech, the current international monetary
system is a mixture of economies, some with open capital accounts and
flexible exchange rates, and others with managed exchange rates, more-
restricted capital mobility, and more-limited monetary policy
independence. Many of these latter economies also have current account
surpluses, in part because authorities have been able to resist currency
appreciation, and thus inhibit external adjustment, for prolonged
periods. This feature of the international system inhibits the process
of global rebalancing and could restrain the current recovery.
Thus, at most, capital controls should be seen as just one of many
tools that can be used to manage capital inflows, and one to be used
only in particularly challenging situations. The IMF work that I
mentioned earlier concludes that capital controls may be appropriate in
conjunction with other policy tools as long as countries meet certain
conditions. Foreign currency reserves should already be adequate, and
exchange rates should not be undervalued. Controls should not be used as
a substitute for necessary macroeconomic policy adjustments; for
example, if the economy is overheating, controls should only be used
along with a suitable monetary-fiscal policy mix. Moreover, controls
should be lifted once these prerequisites no longer apply.
So where do we go from here? What needs to be done for countries to
reap the full benefits of financial openness? In my view, all countries
must continue working toward improving the resilience of their domestic
financial systems to better take advantage of the potential gains from
free international financial flows.
Beyond strengthening our domestic prudential framework, we need to
make further progress in international cooperation on improving
financial regulation and the international monetary system. Central
banks and regulatory agencies are working to design and implement a
stronger set of prudential requirements for large, internationally
active banking firms. Last Decembers agreement on the framework for
Basel III was an important step, and the Federal Reserve is committed to
its timely adoption. Its requirements for more and higher-quality
capital and more-stringent liquidity buffers should increase the
stability of the financial system and reduce the probability of future
crises. In addition, we need to continue to make progress in setting
rigorous international standards, clarifying the responsibilities of
national regulators of internationally diverse financial institutions,
and preventing regulatory arbitrage. We also need to continue to work
toward an international monetary system characterized by more-flexible
exchange rates and independent monetary policies.
The case for increased financial openness is complicated, and one
where many of us have seen our views evolve. As I have already noted,
the challenges to opening domestic financial systems to international
capital flows are real, and getting the appropriate policy frameworks in
place to permit the successful intermediation of these flows, while
crucially important, is likely to take time. But while we should be
pragmatic about the tools we use to manage capital flows, we should also
keep in mind the longterm benefits that financial openness promises.
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** Market News International Washington Bureau: 202-371-2121 **
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