The challenge of high capital inflows to financial stability: an emerging market perspective.

Abstract

High liquidity and continued economic weakness in advanced economies have led to a surge in capital flows to emerging markets with strong fundamentals and open financial accounts such as Brazil. While capital inflows have undeniable benefits to emerging economies, they are also potentially destabilising. Past experience has shown that high levels of capital inflows can lead to exchange rate volatility and credit or asset price bubbles. In the context of Brazil’s inflation-targeting regime for monetary policy, macroprudential measures have proved to be a useful complement to traditional macroeconomic policies. However, today’s imbalanced global economy presents an especially difficult challenge for policymakers. The international financial community needs to work together on two fronts: improving our macroprudential toolkit and building a stronger framework for multilateral macroeconomic cooperation.