Via IMF (Den Internationale Valutafond)

IMF Executive Board Discusses Paper “Toward an Integrated Policy Framework”

October 8, 2020

Washington, DC:
The International Monetary Fund’s Executive Board met on September 28, 2020
to discuss findings of staff’s analytical work on an Integrated Policy
Framework (IPF) aimed at helping formulate appropriate responses to
fluctuations in international capital flows and other shocks. A staff paper
summarizes the key analytical findings, which will serve as an input into a
forthcoming review of the IMF’s

Institutional View on the Liberalization and Management of Capital
. It does not propose changes to the IMF’s operational framework at the
present juncture.

While generally beneficial, cross-border capital flows can generate or
amplify shocks. To manage these flows and achieve domestic and external
stabilization objectives, in practice policy makers resort to different
strategies and instruments and provide various rationales for their

The IPF aims to provide a systematic analytical approach to selecting an
appropriate policy mix for managing large and volatile capital flows and
more generally preserving macroeconomic and financial stability in the face
of domestic and external shocks. It jointly considers the role of monetary,
exchange rate, macroprudential and capital flow management policies and
their interactions with each other and other policies, accounting for
country circumstances. The analysis suggests that the appropriate policy
mix depends on the nature of shocks, country characteristics, and initial
conditions. This finding, however, does not rationalize indiscriminate use
of multiple tools or support their deployment in all circumstances.
Reliance on such tools is also not a substitute for warranted economic
adjustment, deep markets, healthy balance sheets, and strong institutions.

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The framework draws on modeling for small, open economies, empirical
analysis, and a review of country experiences; and has been developed by
IMF staff from various departments.

Executive Board Assessment


Executive Directors welcomed the opportunity to discuss the takeaways from
the Integrated Policy Framework (IPF) analytical workstream. They noted
that policymakers often face difficult tradeoffs in pursuing domestic and
external stabilization objectives in the presence of volatile capital
flows. In this context, they recognized the importance of jointly
considering, under certain circumstances, the role of monetary, exchange
rate (including foreign exchange intervention), macroprudential and capital
flow management policies, and their interactions with each other and other
policies. They noted that having a systematic framework can also help
central banks employing multiple tools communicate policy decisions and
enhance credibility.

Directors agreed that the IPF offers valuable analytical insights into how
country characteristics, initial conditions, and the nature of shocks
affect whether the use of multiple policy tools is warranted. They
appreciated the breadth and depth of the analysis, including advances in
modeling, extensive empirical work, and informative case studies. Directors
agreed that the paper highlights the main tradeoffs in the use of multiple
tools, although many Directors also stressed the importance of other
considerations, including integrating fiscal policy more fully into the
analysis, exploring more deeply multilateral implications or spillovers of
IPF policies, extending the analysis of intertemporal tradeoffs, and
deriving lessons from the COVID-19 crisis. Some Directors also suggested
other potential extensions of the framework.

Directors agreed that optimal policy combinations depend on the nature of
shocks, country characteristics, and initial conditions. They noted the IPF
finding that in countries with flexible exchange rates, deep foreign
exchange markets, and continuous market access, allowing full exchange rate
adjustment to economic and financial shocks is typically optimal. A few
Directors emphasized that in such cases, the findings indicate no rationale
for capital flow management measures. On the other hand, Directors noted
that in the presence of frictions and vulnerabilities common in emerging
market and developing economies, while flexible exchange rates continue to
provide significant benefits, other tools can play a useful role for
certain shocks. In particular, Directors took note of the analytical
finding that macroprudential measures, foreign exchange intervention, and
capital flow management measures can, under certain circumstances, help
enhance monetary autonomy, improve financial and price stability, and
reduce output volatility in countries with financial frictions and/or
balance sheet vulnerabilities. A number of Directors highlighted the
finding that the use of precautionary capital flow management measures can
lower risks to financial stability under certain conditions, although a few
Directors pointed out that such measures tend to become “sticky” and that
policymakers’ ability to adjust them over the financial cycle needs to be
taken into account.

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Directors agreed that the deployment of policy tools should be guided by a
clear framework and an assessment of costs and benefits. The macroeconomic
and financial stabilization benefits of IPF policies need to be balanced
against potential costs in terms of market development and other possible
unintended consequences. The persistent use of IPF tools may perpetuate the
very vulnerabilities that rationalize their deployment. Directors noted
that the use of IPF tools is not a substitute for deep markets, healthy
balance sheets, and strong institutions. The tools should not be used to
support misaligned exchange rates or substitute for warranted macroeconomic
adjustment. In this context, Directors highlighted the Fund’s role in
assisting members in fostering deeper markets, strengthening institutions,
and addressing underlying vulnerabilities. Directors also underscored that
while models provide a useful guide, the complexity of real life situations
and tradeoffs (particularly intertemporal ones), as well as other practical
challenges (such as endogeneity of policy and country conditions and
determining the nature and source of shocks) suggest a need for caution and
judgment in the application of IPF tools and the importance of
communicating clearly the actions and objectives. Similarly, country
experiences should be assessed in detail and carefully integrated in the

Directors emphasized that the analysis does not support indiscriminate use
of IPF tools and that the operationalization of the findings should include
safeguards to minimize the risk of inappropriate use of IPF policies.
Directors noted that ensuring robustness and developing metrics to assess
country characteristics will be essential for translating the framework’s
findings into implementable policy advice. Directors cautioned against the
mechanical application of safeguards and emphasized the need for judgment
when the framework is operationalized.

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Directors affirmed that Fund policy advice remains guided by the
Institutional View on the Liberalization and Management of Capital Flows
and other existing Fund policies. In this context, they emphasized the
importance of careful communication of the IPF’s analytical findings,
acknowledging its assumptions, limitations, and qualifications. Directors
welcomed the intention to use the IPF’s analytical findings as an input for
the upcoming review of the Institutional View, along with the report by the
Independent Evaluation Office on IMF Advice on Capital Flows.

IMF Communications Department


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