Summary
Focus
Policy-makers and practitioners tend to see capital inflows to emerging market economies (EMEs) as expansionary, as they ease domestic financial conditions and boost credit and domestic demand. This, coupled with their volatility, implies that capital flows to EMEs are also a source of vulnerability capable of generating boom-bust cycles. Capital controls and macroprudential policies thus emerge as relevant policy tools to manage associated risks. However, the causal effect of capital inflows on EME macro-financial conditions is hard to pin down empirically and should be key to well-informed policy design.
Click here for full details.