Capital Flows and Capital Account Management in Selected Asian Economies

Gross capital inflows and outflows to and from emerging market economies (EMEs) have witnessed a significant increase since early 2000s. This rapid increase in the volume of flows accompanied by sharp swings in volatility has amplified the complexity of macroeco-nomic management in EMEs. While capital inflows provide additional financing for productive investment and offer avenues for risk diver-sification, unbridled flows could also exacerbate financial instability. This paper focuses on the evolution of capital flows in selected emerg-ing Asian economies, and analyze surge and stop episodes as well as changes in the composition of flows across these episodes. Having identified the episodes, the paper evaluates the policy measures under-taken by these economies in response to the surge and stop of capital flows. These responses encompass negotiating the trilemma in the face of volatile capital flows, intervention in the foreign exchange market by the central bank, and imposing capital controls. This kind of an analysis is highly relevant especially a time when EMEs around the world are about to face the repercussions of a potential Quantitative Easing (QE) tapering by the US or launch of fresh QE measures by the Euro-zone, either of which could once again heighten the volatility of cross-border capital flows thereby posing renewed macroeconomic challenges for major EMEs. JEL Classification: F32; F38 and F41