Policy responses to capital inflows: in emerging Asia and Europe markets

Abstract: This thesis identified large net private capital inflows to emerging markets over last three decades and studied four policy responses towards these inflows, the policies are exchange rate policy, sterilization policy, fiscal policy and capital controls on inflows and outflows. Regions show different pattern in policy evolvement over time, emerging Asia keeps high intervention in exchange rate and high control over capital throughout time, emerging Europe originally had high foreign exchange market intervention and capital control but loosened them over the early 2000s, Nordic countries as sample for small and open advanced economy, remained their autonomy in exchange intervention, and have the lowest growth in government spending and lowest capital control. When seeking policy reaction that help preventing bad consequences of large private inflows, nonpolitical factors such as cumulative size and global output growth stand out as playing significant role, suggesting that effort not only put by specific country but global conditions correlate greatly with surges as trade and business getting globally integrated. However, discipline in government spending and less control over outflows seem to work with softer ending, and intervention in foreign exchange market is useful in limiting currency appreciation. To limit the cumulative size of capital inflow, capital control on both inflows and outflows helps.