This type of experiences is precisely the one that makes us be very cautious when confronted with massive capital inflows, because a reversal could trigger drastic output adjustments. Later on, in the late 1980s and early 1990s, Latin America was again the recipient of substantial capital inflows, which has been thoroughly analyzed in Calvo et al. (1993, 1994). At that time there was also an increase in the current account deficit. Today, considering the forecasts for 2010–2011 contained in the WEO of April 2010, no net inflows are expected for regions as a whole, but what is expected is a reduction in the current account surpluses of emerging economies. Although this scenario has not evidently materialized, it presents risks that have to be considered. Finally, while in the current setting inflows have been offset by similar outflows, we cannot disregard the possibility of sudden gross outflows or sudden stops of gross inflows, generating severe adjustments in the current account with high costs in terms of output. Traditional policy options The first line of defense against massive capital inflows is exchange rate flexibility. Frequently exchange rate rigidities and unsustainable defenses of parities that are away from their fundamental value give way to speculation against the foreign exchange regime. The literature on speculative attacks shows how an exchange rate that is inconsistent with the rest of the policy actions can trigger massive capital outflows that end up forcing its abandonment. The same rationale applies to inflows.

On the other hand, trying to maintain an artificially depreciated exchange rate, especially in contexts of growing financial integration, can only foster speculation and capital inflows, as it increases expected appreciation. Any exceptional measure must be applied only in extreme circumstances and for a limited period of time, once every other instrument has been reasonably exhausted. References Borensztein, E., O. Jeanne, and D. Sandri (2009). “Macro-Hedging for Commodity Exporters.” CEPR Discussion Paper 7513. Caballero, R.J. (2009). “Sudden Financial Arrest.” Mundell-Fleming Lecture prepared for the IMF 10th Jacques Polack Annual Research Conference. Calvo, G., L. Leiderman, and C. Reinhart (1993). “Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors.” IMF Staff Papers 40: 108–51. Calvo, G., L. Leiderman, and C. Reinhart (1994). “Capital Inflows to Latin America: The 1970s and the 1990s.” In E. Bacha (ed. ), Economics in a Changing World, proceedings of the Tenth World Congress of the International economic Association, Vol. 4, London: McMillan. Cowan, K. and J. De Gregorio (2007). “International Borrowing, Capital Controls and the Exchange Rate: Lessons from Chile.” In S. Edwards (ed. ), Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences, NBER and The University of Chicago Press. 6  BIS Review 72/2010  De Gregorio, J. and A. Tokman (2005). “El Miedo a Flotar y la Política Cambiaria en Chile.” Economía Chilena 8(3): 29–54. Kamil, H. and B. Sutton (2008). “Corporate Vulnerability: Have Firms Reduced Their Exposure to Currency Risk?” IMF, Regional Economic Outlook, Western Hemisphere, chapter 5, October.