Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/101214 
Year of Publication: 
2012
Series/Report no.: 
ADBI Working Paper No. 362
Publisher: 
Asian Development Bank Institute (ADBI), Tokyo
Abstract: 
Since the 1980s, emerging countries have been urged to welcome foreign capital inflows. The result has often been a pattern of surges, where excessive inflows were followed by damaging "sudden stops" and reversals. This was dramatically evident in the Asian crisis of 1997 - 1998. Since that crisis, the emerging countries of East Asia have typically run current account surpluses and have accumulated substantial foreign exchange reserves. This has kept them largely protected from the impact of volatile capital flows, but this strategy is neither sustainable nor optimal. What is needed is a strategy that makes use of the potential benefits of capital "flowing downhill" (that would require these countries to run current account deficits) while at the same time protecting them from both the excessive inflows and the reversals. This strategy needs to take account not only of the fickle nature of the capital flows, but the structurally-higher profitability which is characteristic of emerging countries, which motivates the excessive inflows. This strategy would require more active management of both exchange rates and capital flows than has been the accepted "best practice&". This requires a substantial shift in the current policy mindset. The International Monetary Fund has shifted some distance on this issue, but has further to go.
Subjects: 
asian financial crisis
east asia
financial markets
capital flows
current account
JEL: 
F21
F31
F32
Document Type: 
Working Paper

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