The global economy grew strongly in the first half of 2007, although turbulence in financial markets has clouded prospects. While the 2007 forecast has been little affected, the baseline projection for 2008 global growth has been reduced by almost 1/2 percentage point relative to the July 2007 World Economic Outlook Update. This would still leave global growth at a solid 4¾ percent, supported by generally sound fundamentals and strong momentum in emerging market economies. Risks to the outlook, however, are firmly on the downside, centered around the concern that financial market strains could deepen and trigger a more pronounced global slowdown. Thus, the immediate focus of policymakers is to restore more normal financial market conditions and safeguard the expansion. Additional risks to the outlook include potential inflation pressures, volatile oil markets, and the impact on emerging markets of strong foreign exchange inflows. At the same time, longer-term issues such as population aging, increasing resistance to globalization, and global warming are a source of concern.
This chapter examines the policy responses to surges in private capital inflows in a group of emerging market countries and open advanced economies over the past two decades. The results suggest that fiscal restraint during periods of large capital inflows can help limit real currency appreciation and foster better growth outcomes in the aftermath of such episodes. Resisting nominal exchange rate appreciation through sterilized intervention is likely to be ineffective when the influx of capital is persistent. Tightening capital controls does not appear to deliver better outcomes.
You are not logged in and do not have access to this content. Please login or, to subscribe to IMF eLibrary, please click here