IMF Conference

Capital flows to emerging market economies (EMEs) have resumed from the sharp decline in the aftermath of the global financial crisis and are projected to remain high, although volatile, in the coming years. These flows, and capital mobility more generally, allow countries with limited savings to attract financing for productive investment projects, foster the diversification of investment risk, and contribute to the development of financial markets. But, especially since the financial crisis, which has highlighted the potential for procyclical behavior of the financial sector, many EMEs are also concerned about the fragility that large inflows—and herd behavior that contributes to boom-bust cycles—can engender:

• Many of the flows may reflect interest rate differentials, which may be at least partially reversed when policy interest rates in advanced economies (AEs) return to more normal levels. A rapid reversal could also occur if the global recovery falters and there is a renewed increase in global risk aversion. While larger inflows could be the result of improved fundamentals in EMEs over the last decade, and the relative strength of their economies vis-à-vis AEs, a history of "sudden stop" episodes suggests caution before interpreting these flows as a "structural break."
• Large inflows can complicate macroeconomic policy management, leading to exchange rate appreciation pressures or overshooting, and some loss of monetary policy independence. Particularly if the inflows turn out to be temporary, they may entail a costly reallocation of productive resources back to the tradable sector as inflows subside and the exchange rate returns to its more normal level.
• Regardless of whether the inflows are temporary or more persistent, a sudden surge can overwhelm the domestic prudential framework, and wind up fueling asset price bubbles rather than financing worthwhile investments.

A policy response to a surge in capital inflows thus may need to include both macroeconomic and prudential elements. This conference, jointly organized by the Brazilian authorities and the IMF, will provide an opportunity for senior officials and academics to debate the issues, focusing on the root causes of the pickup in capital flows to EMEs, their impact on these economies and the appropriate policy responses.

Kindly note that attendance is by invitation only.