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.

Another conclusion is that in an environment of good, swiftly and decisively-implemented policies that are accepted by the public, the euroization of the economy is not mandatory. Witness in this respect is the experience of the Czech Republic, which has brought inflation down early on, making lending in domestic currency as attractive as that in foreign currency. 5. Central bank’s objective: should financial stability be added? Before the outbreak of the global financial crisis, the conventional lines of thought advocated the idea that markets do self-correct always. The overconfidence in the infallibility of the invisible hand of the market generated a widespread belief that ample interventions by the authorities were not warranted in order to contain economic and financial imbalances at an early stage. Moreover, there was a prevailing view in the academic world that inflation was the main culprit for financial instability. By way of consequence, safeguarding price stability was looked upon as an almost sufficient prerequisite for promoting financial stability. Against this background, central banks’ core contribution to preserving and strengthening financial stability consisted in delivering low inflation rates. However, not everyone agreed. Prior to the outburst of the crisis, several economists had publicly expressed doubts on the viability of mainstream economic thought or had warned against some of its vulnerabilities. Special mention deserves Crockett, who claimed ever since 2003 that the “peace dividend” yielded by the successful war against inflation had not lived up to expectations and therefore the battlefront against financial instability should not be overlooked.