Old Dilemmas, New Challenges: Monetary Policy and Capital Flows into Emerging Economies

For a decade or more, we at the IMF have grappled with the idea that very large capital flows into successful emerging market countries were almost inevitable and would prove extremely difficult to manage. Since these topics were first broached at a theoretical level, we have witnessed developments in a number of emerging economies in Europe that reinforce the concerns and underscore the implications for policy. Two lessons may be learned from the experience. First, the choice between fixed and flexible exchange rates is important, but perhaps not for reasons that are usually put forward. Second, monetary policy—and policy to stabilize the economy more generally—needs substantial reinforcement.