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Fluctuations in International Capital Flows: Challenges and Policy Responses - Part 1

Rapid and significant reversal of private capital flows to a number of emerging economies in the wake of the financial crisis has brought the countries' management of capital flows into international focus. Capital inflows, via improved funding options, pave the way for profitable investment, boosting growth and employment, but may also contribute to overheating of the economy and entail financial risks. Economic policy should be designed to ensure that the improved prosperity will be of a stable and lasting nature. However, it is difficult to reach international agreement on a framework for suitable economic policy measures. This reflects e.g. that some countries fear such a framework would limit their room for political manoeuvre, but also that, so far, there has not been the same focus on the implications for international capital flows of an accommodative monetary policy stance in advanced economies.