Indeed, the level of international reserves should perhaps be judged against the variability of capital flows rather than months of imports, as integration into world capital markets will increase flows in and out. As Paul Krugman has warned, policymakers may need far more reserves than they have so far contemplated. The second policy conclusion is that countries should be wary of fixed but adjustable exchange rate regimes. In both Mexico and Asia, real exchange rate appreciation, growing short-term external debt and widening current account deficits undermined market confidence and prompted speculative attacks. Weak domestic financial systems meant that the tightening in domestic interest rates needed to defend the peg soon became implausible because of its impact on financial intermediaries and corporates.
Countries seem to be better off with floating rates or currency boards.
The basic case for capital liberalisation needs re-stating. This effect can be particularly valuable for developing countries, where domestic resources are in short supply. The prize in theory is increased investment, faster economic growth and improved standards of living. Free flow is the more advantageous if the influx of foreign capital stimulates the broadening and deepening of domestic capital markets. But substantial inflows and outflows of capital can cause enormous problems for economic policymakers, and some commentators believe they outweigh any plausible benefit from free capital flows.