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Policy Responses to Volatile Capital Flows

By Peter J. Montiel


It has now been a decade since developing countries regained access to international capital markets in the wake of the international debt crisis. This is good news, because access to foreign capital carries enormous potential benefits for developing countries. Like all good things, however, it comes at a cost. One important cost for developing countries of becoming reintegrated with international financial markets is that in doing so they subject themselves to potentially very large and very disruptive flows of capital, both inward and outward. Such flows pose very substantial macroeconomic challenges for the countries that they affect. How to cope with these challenges has been at the top of the policy agenda over the past decade for policymakers in the newly reintegrated countries. Unfortunately, a decade has been long enough for developing countries to have accumulated a substantial amount of experience both with very large capital inflows as well as even larger outflows. During the early years of the current decade, as a combination of domestic and external developments resulted in progressively more developing countries restoring their external financial links, the policy problem was how to cope with the very large inflows that often accompanied such reintegration. This concern dominated the agenda of policymakers

Year: 2011
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