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The IMF's is now endorsing capital controls for the first time. However, internal tensions were so sensitive that "some member countries even objected to the title".
Emerging markets are desperate wit the low U.S. dollar and wanted the International Monetary Fund to endorse them for blocking inflows of money.
Although the IMF contained the language for the first time, it said they should be a last resort only. The Brazilian representative at the IMF, Paulo Nogueira Batista, reacted angrily to the recommendations in a time when Brazil faces huge pressure on exchange rates. "The IMF has no accumulated knowledge on the subject, " Nogueira said. "Brazil will do whatever it takes to stem the flow of dollars."
Advanced economies, as expected, completely opposed the idea as it goes againat their export interests.
The IMF opted to call the document a "framework".
Yahoo reports: "The IMF said the framework was an important first step in creating a consensus on how to manage the sudden surge of investor funds flowing into emerging markets in search of higher yields, which risks fueling both asset bubbles and inflation.
The framework helps countries choose from a menu of policy options, including capital controls, to help ward off unwanted surges in capital, a break from a long-held IMF taboo on capital controls.
Allowing for currency appreciation, and purchasing foreign exchange if reserve levels are not adequate, tops the IMF policy list. Other options include lowering policy rates, or tightening fiscal policy to allow space for monetary easing, consistent with inflation objectives and when overheating is not a concern.
The IMF said capital controls could be considered when a country's currency is not undervalued, the economy is overheating and there is no scope to tighten fiscal policy. But it advised against imposing restrictions if an exchange rate is undervalued or as a substitute for other policy steps."
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