The role of capital transaction regulations in emerging market and developing economies under financial globalization

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The analysis of Asian currency crisis shows that the regulatory framework of international capital flows in crisis-hit countries, particularly the lifting of quantitative inflow restrictions or adoption of promotion measures regarding volatile capital including cross-border interbank credits implemented from the end of 1980s, significantly affected the incidence and severity of the crisis, while such market based measures as reserve requirements or foreign exchange position limits that were introduced on the liberalization or strengthened in the face of large capital inflows had a limited restrictive impact on the inflows of such capital. On the contrary, those economies that maintained strict regulations such as approval requirements on external borrowings by banks did not experience large inflow of short-term capital and avoided serious crisis. While theoretical benefits of liberalization of international capital flows that seem to have constituted a background for the liberalization by emerging market and developing economies since 1980s have not been empirically confirmed it is observed that IMF has generally favored , and the US has promoted in relation to specifically targeted countries, liberalization of regulations of international capital flows. This seems to have constituted part of contributing factors to the liberalization of capital flows without sufficient risk management measures by emerging market economies. However, after the Asian crisis, particularly in the face of increasing inflow of capital to emerging market economies in recent years, the stance of the IMF has changed to a more realistic position under which capital inflow controls may be accepted under certain conditions, showing some signs of change in international thoughts on the issue.