To this end, it is prepared to purchase foreign exchange in unlimited quantities and to take further measures immediately if required. Once monetary policy requirements have been met, our foreign exchange investments are guided by three criteria: security, liquidity and return. In order to ensure that we meet the first two criteria – security and liquidity – we hold a substantial portion of our foreign exchange reserves in liquid government bonds, in the most important global currencies; almost threequarters of our foreign exchange reserves are currently invested in such instruments. When it comes to our third criterion – return – equities play an important role as they generally have a higher return potential than the government bonds of the major advanced economies. Currently, 16% of our foreign exchange reserves are invested in equities. BIS central bankers’ speeches  1  Given how substantial our foreign exchange reserves are, doing justice to all three of these criteria simultaneously is no simple matter. On the one hand, the considerable growth of our foreign exchange reserves has increased the concentration risk associated with conventional government bonds; on the other hand, there is the risk that we may overuse certain markets, thereby potentially triggering undesired price fluctuations. We therefore evaluate investment possibilities on a continual basis. As part of our search for diversification, Asia-Pacific markets in particular have become increasingly important for the SNB’s investment policy in recent years.

Thus, the Fund has recently published several papers concluding that, under particular circumstances, controls are justifiably part of the policy toolkit of emerging market economies faced with massive capital inflows. There were some economists in Romania who opposed the removal of controls, as it acted as an obstacle to the shift from monetary targeting to inflation targeting back in 2005. Similar recommendations were formulated by the IMF mission under Romania’s first precautionary stand-by arrangement, which suggested that the liberalization of monetary flows, scheduled for 2005–2006, be postponed until the interest rate differential narrows sufficiently and the banking system is prepared to deal with large inflows of volatile capital. Such a postponement was not possible as Romania’s entry into the European Union in 2007 was conditional upon full capital account liberalization. In order to better understand the role of capital controls, we need to look first at the benefits of capital inflows. Supporters of free capital movement rightly point out that capital flows are actually a source of additional financing for emerging market economies, while also providing opportunities for risk diversification and helping avoid abrupt changes in consumption (Ostry et al., 2011). The keyword here is the capital volume. Excess capital triggers the aforementioned imbalances. Then it is only reasonable to admit that the actions we need to take should contain capital inflows to levels that (i) allow the economy to operate at its potential rate, (ii) do not lead to the accumulation of foreign reserves above the adequate level, and (iii) do not determine currency overvaluation.