432:
what it has to pay out on the bonds it issues domestically to check inflation. In some cases, however, a profit can be made. In the strict textbook definition, sterilization refers only to measures aimed at keeping the domestic monetary base stable; an intervention to prevent currency appreciation that involved merely buying foreign assets without counteracting the resulting increase of the domestic money supply would not count as sterilization. A textbook sterilization would be, for example, the
Federal Reserve's purchase of $ 1 billion in foreign assets. This would create additional liquidity in foreign hands. At the same time, the Fed would sell $ 1 billion of debt securities into the US market, draining the domestic economy of $ 1 billion. With $ 1 billion added abroad and $ 1 billion removed from the domestic economy, the net capital inflow that would have influenced the currency's exchange rate has undergone sterilization.
502:, one of the architects of the Bretton Woods system, considered capital controls to be a permanent part of the global economy. Both advanced and emerging nations adopted controls; in basic theory it may be supposed that large inbound investments will speed an emerging economy's development, but empirical evidence suggests this does not reliably occur, and in fact large capital inflows can hurt a nation's economic development by causing its currency to appreciate, by contributing to inflation, and by causing an unsustainable "bubble" of economic activity that often precedes financial crisis. The inflows sharply reverse once
388:
central bank has a ready means to lower the value of its own currency; if it needs to, it can always create more of its own currency to fund these purchases. The risk, however, is general price inflation. The term "printing money" is often used to describe such monetization, but is an anachronism, since most money exists in the form of deposits and its supply is manipulated through the purchase of bonds. A third mechanism that central banks and governments can use to raise or lower the value of their currency is simply to talk it up or down, by hinting at future action that may discourage speculators.
326:(FDI) refers to long-term capital investment, such as the purchase or construction of machinery, buildings, or whole manufacturing plants. If foreigners are investing in a country, that represents an inbound flow and counts as a surplus item on the capital account. If a nation's citizens are investing in foreign countries, that represents an outbound flow and counts as a deficit. After the initial investment, any yearly profits that are not reinvested will flow in the opposite direction but will be recorded in the current account rather than as capital.
311:
408:
central bank, China's capital account had a large surplus, as it had been the recipient of much foreign investment. If the reserve account is included, however, China's capital account has been in large deficit, as its central bank purchased large amounts of foreign assets (chiefly US government bonds) to a degree sufficient to offset not just the rest of the capital account, but its large current account surplus as well.
452:(SNA). In the IMF's definition, the capital account represents a small subset of what the standard definition designates the capital account, largely comprising transfers. Transfers are one-way flows, such as gifts, as opposed to commercial exchanges (i.e., buying/selling and barter). The largest type of transfer between nations is typically foreign aid, but that is mostly recorded in the current account. An exception is
375:
the nation's capital account, and this will act to raise the value of its currency. A relatively low interest rate will have the opposite effect. Since World War II, interest rates have largely been set with a view to the needs of the domestic economy, and moreover, changing the interest rate alone has only a limited effect.
365:) of a nation's currency, while outbound flows can cause a fall in value (depreciation). If a government (or, if authorized to operate independently in this area, the central bank itself) does not consider the market-driven change to its currency value to be in the nation's best interests, it can intervene.
431:
where it sells bonds domestically, thereby soaking up new cash that would otherwise circulate around the home economy. A central bank normally makes a small loss from its overall sterilization operations, as the interest it earns from buying foreign assets to prevent appreciation is usually less than
387:
When a currency rises higher than monetary authorities might like (making exports less competitive internationally), it is usually considered relatively easy for an independent central bank to counter this. By buying foreign currency or foreign financial assets (usually other governments' bonds), the
378:
A nation's ability to prevent a fall in the value of its own currency is limited mainly by the size of its foreign reserves: it needs to use the reserves to buy back its currency. Starting in 2013, a trend has developed for some central banks to attempt to exert upward pressure on their currencies by
374:
Conventionally, central banks have two principal tools to influence the value of their nation's currency: raising or lowering the base rate of interest and, more effectively, buying or selling their currency. Setting a higher interest rate than other major central banks will tend to attract funds via
459:
The IMF's capital account does include some non-transfer flows, which are sales involving non-financial and non-produced assets—for example, natural resources like land, leases and licenses, and marketing assets such as brands—but the sums involved are typically very small, as most movement in these
84:
in the capital account means money is flowing into the country, but unlike a surplus in the current account, the inbound flows effectively represent borrowings or sales of assets rather than payment for work. A deficit in the capital account means money is flowing out of the country, and it suggests
486:
on the international sale of specific financial assets, or caps on the size of international sales and purchases of specific financial assets. While usually aimed at the financial sector, controls can affect ordinary citizens, for example in the 1960s
British families were at one point restricted
426:
is a term commonly used to refer to operations of a central bank that mitigate the potentially undesirable effects of inbound capital: currency appreciation and inflation. Depending on the source, sterilization can mean the relatively straightforward recycling of inbound capital to prevent currency
403:
was a case where it had insufficient reserves of foreign currency to do this successfully. Conversely, in the early 21st century, several major emerging economies effectively sold large amounts of their currencies in order to prevent their value rising, and in the process built up large reserves of
510:
in favor of free market orientated policies, countries began abolishing their capital controls, starting between 1973–74 with the US, Canada, Germany and
Switzerland and followed by Great Britain in 1979. Most other advanced and emerging economies followed, chiefly in the 1980s and early 1990s.
407:
Sometimes the reserve account is classified as "below the line" and thus not reported as part of the capital account. Flows to or from the reserve account can substantially affect the overall capital account. Taking the example of China in the early 21st century, and excluding the activity of its
334:
refers to the purchase of shares and bonds. It is sometimes grouped together with "other" as short-term investment. As with FDI, the income derived from these assets is recorded in the current account; the capital account entry will just be for any buying or selling of the portfolio assets in the
463:
Transfers apart from debt forgiveness recorded in the IMF's capital account include the transfer of goods and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets, the transfer of funds received to the sale or acquisition of fixed assets, gift and
345:
includes capital flows into bank accounts or provided as loans. Large short-term flows between accounts in different nations commonly occur when the market can take advantage of fluctuations in interest rates and/or the exchange rate between currencies. Sometimes this category can include the
383:
rather than by directly selling their foreign reserves. In the absence of foreign reserves, central banks may affect international pricing indirectly by selling assets (usually government bonds) domestically, which, however, diminishes liquidity in the economy and may lead to deflation.
518:. While most Asian economies didn't impose controls, after the 1997 crises they ceased to be net importers of capital and became net exporters instead. Large inbound flows were directed "uphill" from emerging economies to the US and other developed nations. According to economist
360:
to buy and sell foreign currencies; it can be a source of large capital flows to counteract those originating from the market. Inbound capital flows (from sales of the nation's foreign currency), especially when combined with a current account surplus, can cause a rise in value
427:
appreciation and/or a range of measures to check the inflationary impact of inbound capital. The classic way to sterilize the inflationary effect of the extra money flowing into the domestic base from the capital account is for the central bank to use
468:. In a non-IMF representation, these items might be grouped in the "other" subtotal of the capital account. They typically amount to a very small amount in comparison to loans and flows into and out of short-term bank accounts.
392:, a practice used by major central banks in 2009, consisted of large-scale bond purchases by central banks. The desire was to stabilize banking systems and, if possible, encourage investment to reduce unemployment.
718:
However, in late 2011 China also had periods when it was selling foreign reserves to prevent depreciation, this was due to surges of funds leaving the country through the private sector component of the capital
487:
from taking more than ÂŁ50 with them out of the country for their foreign holidays. Countries without capital controls that limit the buying and selling of their currency at market rates are said to have full
456:, which in a sense is the transfer of ownership of an asset. When a country receives significant debt forgiveness, that will typically comprise the bulk of its overall IMF capital account entry for that year.
306:
536:
reported several emerging economies such as Brazil and India had begun to implement or at least signal the possible adoption of capital controls to reduce the flow of foreign capital into their economies.
482:
Capital controls are measures imposed by a state's government aimed at managing capital account transactions. They include outright prohibitions against some or all capital account transactions,
182:
440:
The above definition is the one most widely used in economic literature, in the financial press, by corporate and government analysts (except when they are reporting to the IMF), and by the
498:
agreement established at the close of World War II, most nations put in place capital controls to prevent large flows either into or out of their capital account.
652:
By the law of supply and demand, reducing the supply of currency available by buying up large quantities on the forex markets tends to raise the price.
934:
189:
941:
115:
449:
315:
96:(IMF) and affiliated sources. The IMF splits what the rest of the world calls the capital account into two top-level divisions:
362:
31:
1082:
637:
507:
66:
1026:
663:
530:
to the global crises had resulted in increased movement of capital back towards emerging economies. In
November 2009 the
395:
As an example of direct intervention to manage currency valuation, in the 20th century Great
Britain's central bank, the
1051:
527:
978:
612:
523:
17:
488:
444:. In contrast, what the rest of the world calls the capital account is labelled the "financial account" by the
1087:
1077:
945:
399:, would sometimes use its reserves to buy large amounts of pound sterling to prevent it falling in value.
833:
515:
445:
93:
998:
483:
417:
323:
54:
803:
799:
737:
514:
An exception to this trend was
Malaysia, which in 1998 imposed capital controls in the wake of the
888:
428:
765:
730:
556:
42:
826:
495:
331:
8:
1002:
667:
561:
546:
499:
389:
70:
62:
702:
974:
892:
860:
633:
608:
86:
104:, with by far the bulk of the transactions being recorded in its financial account.
1022:
519:
310:
81:
932:
788:
by
Krugman and Obstfeld which uses the IMF definition in at least its 5th edition.
756:
1030:
758:
532:
477:
400:
396:
336:
74:
503:
38:
1071:
380:
827:"Balance of Payments and International investment position manual, Chs.5,13"
526:. By the second half of 2009, low interest rates and other aspects of the
864:
551:
357:
997:
A Beattie; K Brown; P Garnham; J Wheatley; S Jung-a; J Lau (2009-11-19).
884:
861:"Understanding Capital And Financial Accounts In The Balance Of Payments"
465:
453:
441:
933:
Eswar S. Prasad; Raghuram G. Rajan; Arvind
Subramanian (2007-04-16).
460:
items occurs when both seller and buyer are of the same nationality.
318:
in Hong Kong, where many capital account transactions are processed.
996:
369:
92:
The term "capital account" is used with a narrower meaning by the
757:
J. Onno de
Beaufort Wijnholds and Lars Søndergaard (2007-09-16).
58:
522:
the large inbound flow into the US was one of the causes of the
301:{\displaystyle {\text{Capital Account}}=\left+\left+\left+\left}
728:
731:"Currency Crises and Capital Controls: A Selective Survey"
73:, the capital account reflects net change in ownership of
464:
inheritance taxes, death levies, and uninsured damage to
506:
takes places after the crisis occurs. As part of the
192:
118:
177:{\displaystyle {\text{Capital Account}}=\left-\left}
27:
Record of the net flow of investment into an economy
1049:
701:
300:
176:
69:. Whereas the current account reflects a nation's
800:"Balance of Payments: Categories and Definitions"
759:"RESERVE ACCUMULATION - Objective or by-product?"
661:
61:. It is one of the two primary components of the
1069:
1052:"Time For Coordinated Capital Account Controls?"
1021:
607:(3rd ed.). Prentice Hall. pp. 430–42.
356:. The reserve account is operated by a nation's
370:Central bank operations and the reserve account
435:
919:. Oxford University Press. pp. 185, 198.
404:foreign currency, principally the US dollar.
821:
819:
729:Sweta C. Saxena; Kar-yiu Wong (1999-01-02).
630:Paul Wilmott Introduces Quantitative Finance
992:
990:
883:
664:"Beware the EM central bank FX swap trend"
450:United Nations System of National Accounts
914:
854:
852:
850:
816:
30:For the accountancy use of the term, see
1043:
987:
928:
926:
858:
580:
578:
576:
309:
1015:
999:"Worried nations try to cool hot money"
968:
797:
627:
567:
14:
1070:
962:
910:
908:
847:
691:
689:
687:
685:
683:
621:
584:
32:Capital account (financial accounting)
935:"Foreign Capital and Economic Growth"
923:
889:"Greek Lessons for the World Economy"
602:
598:
596:
573:
695:
905:
784:Though with a few exceptions, e.g.
680:
471:
24:
593:
281:
256:
231:
206:
157:
132:
25:
1099:
1050:Arvind Subramanian (2009-11-18).
662:Izabella Kaminska (2013-09-04).
411:
877:
791:
778:
605:International Financial Markets
750:
722:
712:
655:
646:
489:capital account convertibility
107:
13:
1:
1027:"The Dollar and the Deficits"
524:financial crisis of 2007–2008
422:In the financial literature,
85:the nation is increasing its
51:capital and financial account
1083:International macroeconomics
971:Inside International Finance
508:displacement of Keynesianism
316:International Finance Centre
7:
834:International Monetary Fund
628:Wilmott, Paul (2007). "1".
589:. Penguin. pp. 556–58.
540:
516:1997 Asian Financial Crisis
446:International Monetary Fund
436:International Monetary Fund
165:ownership of foreign assets
135:Change in foreign ownership
94:International Monetary Fund
87:ownership of foreign assets
10:
1104:
475:
415:
53:, records the net flow of
29:
969:Roberts, Richard (1999).
418:Sterilization (economics)
324:Foreign direct investment
917:Global Political Economy
915:Ravenhill, John (2005).
804:University of Washington
738:University of Washington
708:. Yale University Press.
1054:. The Baseline Scenario
786:International economics
528:government led response
696:Wolf, Martin (2009). "
603:Orlin, Crabbe (1996).
429:open market operations
319:
302:
178:
65:, the other being the
973:. Orion. p. 25.
704:Fixing Global Finance
585:Sloman, John (2004).
557:Factors of production
313:
303:
179:
43:international finance
568:Notes and references
332:Portfolio investment
190:
186:Breaking this down:
116:
49:, also known as the
1088:International trade
1078:Balance of payments
1003:The Financial Times
668:The Financial Times
562:Net capital outflow
547:Balance of payments
500:John Maynard Keynes
390:Quantitative easing
63:balance of payments
942:Peterson Institute
320:
298:
174:
160:Change in domestic
140:of domestic assets
893:Project Syndicate
639:978-0-470-31958-1
484:transaction taxes
292:
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242:
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235:
217:
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210:
196:
168:
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136:
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98:financial account
16:(Redirected from
1095:
1063:
1062:
1060:
1059:
1047:
1041:
1040:
1038:
1037:
1023:C. Fred Bergsten
1019:
1013:
1012:
1010:
1009:
994:
985:
984:
966:
960:
959:
957:
956:
950:
944:. Archived from
939:
930:
921:
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903:
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871:
856:
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659:
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644:
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625:
619:
618:
600:
591:
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582:
520:C. Fred Bergsten
472:Capital controls
454:debt forgiveness
343:Other investment
307:
305:
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1033:
1031:Foreign Affairs
1020:
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1007:
1005:
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988:
981:
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931:
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533:Financial Times
480:
478:Capital control
474:
438:
420:
414:
401:Black Wednesday
397:Bank of England
372:
354:Reserve account
348:reserve account
337:capital markets
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195:Capital Account
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163:
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138:
133:
131:
127:
121:Capital Account
119:
117:
114:
113:
112:At high level:
110:
102:capital account
75:national assets
67:current account
47:capital account
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28:
23:
22:
18:Capital inflows
15:
12:
11:
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887:(2010-05-11).
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700:, esp chp 3".
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504:capital flight
494:Following the
476:Main article:
473:
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448:(IMF) and the
437:
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416:Main article:
413:
410:
381:currency swaps
371:
368:
367:
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340:
335:international
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229:
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209:Foreign Direct
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39:macroeconomics
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980:0-7528-2070-2
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951:on 2009-12-14
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496:Bretton Woods
492:
490:
485:
479:
469:
467:
461:
457:
455:
451:
447:
443:
433:
430:
425:
424:sterilization
419:
412:Sterilization
409:
405:
402:
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382:
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364:
359:
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352:
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1056:. Retrieved
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1025:(Nov 2009).
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964:
953:. Retrieved
946:the original
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879:
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865:Investopedia
838:. Retrieved
836:. 2008-12-12
807:. Retrieved
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769:. Retrieved
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741:. Retrieved
724:
714:
703:
697:
671:. Retrieved
657:
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629:
623:
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552:Capital good
531:
513:
493:
481:
466:fixed assets
462:
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377:
373:
363:appreciation
358:central bank
353:
347:
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885:Dani Rodrik
108:Definitions
1072:Categories
1058:2009-12-15
1036:2009-12-15
1008:2009-12-15
955:2009-12-15
898:2010-05-19
870:2009-12-11
840:2009-12-11
809:2009-12-11
771:2009-12-16
743:2009-12-16
673:2013-09-09
442:World Bank
264:Investment
239:Investment
214:Investment
71:net income
55:investment
632:. Wiley.
587:Economics
379:means of
234:Portfolio
150:−
719:account.
541:See also
57:into an
289:Account
284:Reserve
82:surplus
59:economy
977:
698:passim
636:
611:
45:, the
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259:Other
975:ISBN
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314:The
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