marginal cost of capital, accelerates investment and growth. c. according to stanley fischer, ‘.... open capital accounts support the multilateral trading systems by broadening the channels through which countries can finance trade and investment. ” d. open capital accounts facilitate portfolio diversification by investors in developed as well as developing countries. e. because the feasibility of capital account convertibility rests on sound macroeconomic policy, it creates a sort of commitment for the country concerned to ensure better macroeconomic management, lest it is punished by the investors. as rudiger dornbusch puts it, “ the capital market fulfils an important supervisory function over economic policy ” downsides of capital convertibility 8. unlike current account convertibility, capital account convertibility does not come without a downside. but before we discuss the downside it will be in order to point out that reservations have been expressed about the most important contribution of capital account convertibility, that is, its role in better allocation of global savings. it has been pointed out that often capital movement is guided by considerations such as tax savings which improve the returns to the investor but does not contribute to increased productivity. secondly, neither open capital account constitute sufficient conditions to ensure capital flows into a country nor do capital flows, in absence of appropriate institutional framework in the receiving country, contribute to growth and welfare. on the other hand, it has been argued that free capital accounts were not necessary for the phenomenal growth recorded by countries in the diverse parts of the world. as jagdish bhagwati observes in his celebrated 1998 paper, “ after all, china and japan, different in politics and sociology as well as historical experience, have registered remarkable growth rates. western europe ’ s return to prosperity was also bis central bankers ’ speeches achieved without capital account convertibility. ” elsewhere in the same paper he remarks, “ substantial gains ( from capital account convertibility ) have been asserted, not demonstrated, and most of the payoff can be obtained by direct equity investment. ” ( emphasis added ), a theme to which i shall return shortly. 9. let us now look at the specific downsides of full convertibility in the capital account : a. it is recognised that capital flows are sensitive to macroeconomic conditions. any deterioration in fiscal conditions, inflation management, balance of payments, or any other macroeconomic shock may cause a cessation or reversal of capital flows b. capital flows, inasmuch as they result essentially

drift from their targets, the objective is to bring it back to target over the medium - term. however, conventional monetary policy has a limiting condition of “ zero lower bond ”. for example, in the event of an extreme shock, as it happened during the global financial crisis, when policy rates were brought down close to zero, further monetary stimulus was not possible through conventional monetary policy. when central banks look beyond their traditional instrument of policy interest rate, monetary policy takes an unconventional character. it essentially means using quantity instruments for expanding the balance sheet of the central bank. it can take different forms : quantitative easing ( qe ) through direct long - term asset purchase by the central bank, credit easing ( ce ) by the central bank directly intervening in a particular segment of the credit market. both qe and ce can be accompanied by dilution of collateral standards by the central bank expanding the list of collateral beyond its traditional preference for low risk sovereign bonds. unconventional monetary policy is invariably accompanied by forward guidance regarding the future path of monetary policy to work on the expectations channel. this is because the efficacies of asset purchases programme depend on the behaviour of market participants bis central bankers ’ speeches and financial entities. it is likely that market participants may not alter their behaviour without knowing what the central bank will do in the future with regard to these instruments. in the event of a crisis, it is not unusual for central banks to expand their balance sheets. the greatest received wisdom in central banking is the lender of last resort ( lolr ) function based on the bagehot principle that, “ the central bank should lend freely against good collateral at a penal rate ” 1. in fact, many early central banks including the us fed were instituted to largely discharge this function. monetary policy as we understand today was alien then. it is a different matter that the recent global financial crisis tested the limits of bagehot principle as never before. contours of unconventional monetary policy let me now turn to how the us fed, the european central bank ( ecb ), the bank of england ( boe ) and the bank of japan ( boj ) unveiled their unconventional monetary policies. i may mention that the boj was using unconventional monetary policy much earlier as japan went into prolonged deflation from the late 1990s. the global financial crisis which erupted with collapse of major financial institutions in advanced economies was unprecedented in its scale. not only did it lead to a sharp decline in asset prices, freezing of credit markets,