Capital flow management (CFM) has become part of accepted toolbox and there is a growing literature on the second-best use of capital controls, such as pecuniary and aggregate demand externalities. With a focus on “prudential use” and similar developments for foreign currency reserves, this research paper revisits CFM literature using a unified framework. It delves into the following themes:
- Monetary policy dilemmas
- Capital controls ex ante and ex post
- FX reserves: exchange rate management or precautionary? • A reconciliation
- Controls on outflows as crisis management
And it reviews the stylized facts, and the chronology and effectiveness of policies.