II Stop and Go of Capital Flows and Deleveraging
Managing stop-go capital flows in Asian emerging markets: lessons for the CESEE economies
It is a distinct pleasure to be able to share my views on managing stop-go capital flows. There is no doubt that destabilizing capital flows continue to be an important policy challenge facing all central banks in emerging market economies. This has never been more true than today when economic and financial globalization continues apace. And, while each Central, Eastern and South-Eastern European (CESEE) economy has its own special circumstances that call for tailored policy responses, there are nonetheless broad lessons to be learned from the experiences of others. In this sense, the lessons from emerging Asia in their putative ability to successfully manage the stop-go capital flow risks are instructive.
My thesis today is that recent experiences in Asian emerging markets point to good policy choices but also to good luck in dealing with capital flows. Good policies have helped, so far, to improve the resilience of economies to the potentially destabilizing forces associated with crossborder capital flows; concerns about the longer-run side-effects of these policies still remain. But I want also to argue that good luck has played a role, too. This has been in the shape of more moderate flows than were expected. Of course, there is no guarantee of such a favourable risk environment in the future, in Asia or elsewhere. This leads me to the conclusion that policy-makers must remain vigilant not only to the possible side-effects of policies but also to the tail risks of future destabilizing capital flows.
To develop this thesis, I first highlight the policies that have been employed successfully by policy-makers in emerging Asia to deal with volatile capital flows. Secondly, I offer a perspective on the tail risks that still exist despite this success. Finally, I draw some tentative lessons for emerging-market economies, especially in CESEE.