Managing Capital Flows

A high-level conference on managing capital flows was held on 14 March 2008 as the third in a series of conferences for the project Managing Capital Flows: Search for a Framework under the umbrella of the ADBI-supported Asian Policy Forum. The participants included senior officials of the ministries of finance and central banks of ASEAN+3 and India, multilateral agencies, academics, and members of the research team consisting of international experts and prominent researchers from Asian think tanks.

The participants discussed the project’s findings thus far, noting that despite sizeable current account surpluses, many emerging Asian economies have received significant private capital inflows (see Figure).

Sterilization, a tool applied by many emerging Asian economies to prevent real exchange rate appreciation and overheating, has become increasingly costly as foreign capital continues to flow into these economies. Moreover, results of country studies suggest that such foreign exchange intervention has had limited effectiveness in preventing real appreciation over the medium term, as inflation eventually picks up. An alternative policy response discussed was establishing a credible reservesharing arrangement at least at the regional level.

The participants also discussed other options for managing surges in capital inflows. One was making the fiscal policy stance countercyclical to surges in capital inflows to reduce the risk of an overheating economy and the appreciation pressure on the domestic economy. Second was the use of effective measures to control capital inflows, bearing in mind the not-so-successful experience of Thai control introduced in December 2006. Another option could be organizing collective action at the regional level that can increase the options available to individual countries. An example is regional exchange rate coordination, where collective appreciation would spread the adjustment costs across Asia.

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