Flexible exchange rates have, almost by definition, brought greater volatility in currency markets. But it is not clear that the prices of other types of assets are more volatile. Careful statistical studies show that share prices, for example, fluctuate no more today than they did when capital flows were limited. Bond markets have on average been no more volatile during this decade than in the 1970s. The claim that governments' macroeconomic policies are becoming less effective is more complicated.
Governments retain their basic tools of fiscal and monetary policy just as much as they ever did.
The difference lies in the impact each tool has. In an economy where capital cannot flow easily across borders, two basic economic truths hold. The first is that greater government borrowing will eventually push up interest rates. The second is that excessive monetary growth will eventually result in higher inflation. These basic constraints are not magically removed with capital mobility.