It is hard to conceive a general rule governing the use of capital controls to deal with massive capital inflows, but it is certainly more difficult to apply such controls in economies highly integrated to the world markets. Something that the evidence seems to suggest is that capital controls affect mainly the composition of the flows, not necessarily their magnitude. In that case, in order to affect the composition of international liabilities, in particular those intermediated by the banking sector, it would be more efficient to direct the eye toward financial regulation rather than to capital controls. In addition, macro-prudential regulations should be used to mitigate the procyclicality of capital flows. These measures could include BIS Review 72/2010  5  liquidity management policies, for instance imposing differentiated liquidity requirements for short-term and long-term financing flowing to banks or to other financial agents. Final remarks To conclude, we must first emphasize that global financial integration entails extensive benefits, as it allows to smooth expenditure fluctuations and to obtain resources to finance investments in countries with capital shortage. However, we have also learned that capital flows can be destabilizing, particularly when financial systems are fragile and macroeconomic policies inconsistent. Long-lasting boom periods have always presented challenges to macroeconomic policy making. Sadly, the passing from economic boom to a costly recession is a too recurrent experience for emerging economies, especially in Latin America.

In Latin America, the hoarding of reserves has been used several times. In the first half of the 1990s it was used to deal with strong capital inflows; in the 2000s it has been used much more frequently (figure 8). Intervening the foreign exchange market via reserve accumulation also serves the purpose of improving the international liquidity position, which is a form of self-insurance against external financial turmoil. Today other forms of insurance are available, that are more costeffective. For example, this is the case of contingent credit lines of the IMF or hedging instruments to hedge against fluctuations in the terms of trade (Borensztein et al., 2009; Caballero, 2009). But the estimated benefits of these forms of insurance vis-à-vis selfinsurance through reserve accumulation do not consider the fact that this latter option has also a stabilizing effect on the exchange rate, because the accumulation is done at a time when the exchange rate is overly appreciated with respect to its fundamentals. Furthermore, one can think that the presence of efficient insurance mechanisms may exacerbate capital 4  BIS Review 72/2010  inflows during boom periods in emerging economies. Therefore, these are instruments that can prove beneficial in critical times, but may create some inconveniences in normal or favorable periods. Some economies have adopted regimes where limited interventions are applied with some frequency. Nonetheless, larger interventions, which are precisely the ones that may have a substantial effect on foreign exchange markets, entail quasi-fiscal costs that must be taken into account.