IMF recommends US to accumulate FX reserves and impose Capital inflows controls

The U.S. isn’t expected to return to full employment for at least six more years, and the consensus in Washington seems to be that President Barack Obama’s administration has no options to improve that dreary outlook.

The debate over tax increases and spending cuts, as well as the latest statement from the Federal Reserve, proves that additional fiscal and monetary stimulus won’t be coming unless the economy turns even worse. But there’s one weapon the Obama administration can fire to get a more satisfactory recovery in employment: taking action to narrow the longstanding deficit in international trade. Millions of jobs are at stake.

As it happens, the International Monetary Fund recently gave a green light to measures the administration could use to reduce the trade deficit in a formal statement of its “institutional view” on the management of capital flows.

Capital flows directed by a number of foreign governments into the U.S. have grown to unprecedented levels in recent years. These flows keep foreign exports artificially cheap and make U.S. exports artificially expensive to foreign buyers; they are the main reason the U.S. has a large trade deficit right now. The country should take heed of the IMF’s recommendations and act forcefully to damp these distortionary capital inflows and to restore balance in international trade.

For countries in the position of the U.S., the IMF doctrine recommends policy measures be taken in the following order. Each successive step should be taken only if the previous ones have been pursued aggressively and proved insufficient.


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