ABSTRACT
This chapter explores the logic of the capital account developments and examines the reasons why the code of conduct for international economic policy should be updated to account for global economic developments. It describes the evolution of international capital flows and the consequent divergence between the reality of the international economy and the code of conduct that is supposed to guide it. The analysis also examines capital controls from the perspective of their costs and benefits and assesses their effectiveness. The chapter then examines the interaction of free capital movements with national macroeconomic policies in general, and with monetary and exchange rate management in particular. It discusses the systemic implications of the liberalization of international capital flows. An essential development in the international economy since the abandonment of the Bretton Woods order has been the growth of gross and net capital flows and the resulting integration of national financial markets, particularly those in the industrial countries.
