Recipient countries face a series of policy choices to respond effectively to the inflows.
After being excluded from world capital markets during the debt crisis, many developing countries have experienced large capital inflows in the past five years. The challenges these inflows pose for domestic policy have generated a substantial literature. Fernandez-Arias and Montiel review and extend that literature. They characterize the new inflows, assess their causes and likelihood of sustainability, analyze the policy issues they raise, and evaluate possible policy responses. Their conclusions tie desirable policy responses to characteristics of both the flows themselves and to those of the recipient economy.