Abstract:

This paper discusses a proposal to include capital flows volatility as an additional variable in the quota formula. The motivation is to capture macroeconomic volatility associated with capital accounts shocks as well as countries' vulnerabilities to balance of payment crisis. A proposal to this effect was requested by the G-24 Ministers in the communiqué of October 2004 and also introduced in recent quota reviews at the IMF.

However, the methodology put forward by IMF staff papers measures capital flows volatility in dollar terms. This measure does not fully capture the vulnerabilities of balance of payment crises because it does not take into account the differential macroeconomic impact of volatility among developing and industrial countries. In particular, fluctuation in capital flows implies a bigger adjustment for developing countries since capital flows to these countries represent a larger share of their economies and tend to be more volatile.

We propose an alternative measurement of capital flow volatility based on the volatility of net capital flows as a proportion of GDP and argue that it is a more appropriate measure to capture the economic effects of capital flow volatility. We also measure volatility in exports and capital flows altogether as a share of GDP to capture countries' total vulnerabilities to balance of payment crisis arising not only from capital account shocks but also from current account shocks, i.e. commodity shocks.