Capital account liberalization and financial sector stability

Author: A working group led by Shingo Ishii and Karl Hafer
Publisher:
Publication Date: 2006-04-01
Features: Capital account liberalization is a complex process, the success of which depends on reasonable phased implementation and proper coordination with macroeconomic policies and other policies. Among these, proper coordination with structural policies aimed at strengthening the domestic financial system is particularly important. Given that countries implementing capital account liberalization adopt different approaches and initial conditions, some have successfully completed capital account liberalization and maintained the stability of their financial sectors, while others have experienced financial crises. This paper analyzes the relationship between capital account liberalization and policies affecting financial sector stability. Drawing on the experience of other countries, we propose a practical framework for capital account liberalization. This framework explains the phased implementation of capital account liberalization and the coordination between capital account liberalization and policies aimed at maintaining financial sector stability. For this purpose, the paper focuses particularly on policies that are conducive to establishing a solid domestic financial structure. The book includes: phased implementation framework, prudent regulatory framework and capital account liberalization, and relevant national experiences on capital account liberalization and financial sector stability.