Thursday, October 11, 2007

Coping with capital inflows

The IMF's World Economic Outlook has a chapter on capital inflows which is highly relevant for contemporary Indian debates on macro policy. They have done interesting empirical work in the form of examining a database of episodes of high capital inflows.

I hate to give you a sound bite when you should read the full chapter, but if there's a quick summary it is this. The wrong thing to do in response to a capital surge is: capital controls and sterilised intervention. In other words, the bulk of the Indian monetary policy response is wrong. The right thing to do in response to a capital surge according to the WEO is: fiscal consolidation.

Menzie Chinn has written a nice blog entry about it, and Andy Mukherjee links it to recent developments in Asia.

Please note: LaTeX mathematics works. This means that if you want to say $10 you have to say \$10.