2003 and 2005. a simple observation of the data therefore suggests that growth differentials are more important in driving capital inflows than interest rate differentials. the latter have remained quite stable for several years, and the main stylized fact of the past decade and a half has been a significant shrinkage of short term interest rates in emerging economies. a more suggestive interpretation of these broad medium - term trends is that high growth in emerging economies attracted capital inflows. prudent macroeconomic management in emerging economies ( especially compared to previous decades ), allowed an improvement in external and fiscal solvency, alongside appreciation pressures. these factors helped implement lower interest rates. this different macroeconomic backdrop has also implied that today current account balances in emerging economies do not display the significant deficits observed in the run - up to crises during the 1980s or 1990s ( figure 4 ). the lack of a significant widening of the current account deficits should also indicate that current concerns about ( net ) capital flows into emerging economies could be premature, although for specific economies they could be posing more immediate policy challenges. dealing with capital inflows traditionally, the primary concern in emerging market economies about large capital inflows has been that they may be financing an unsustainable current account deficit that could derive in a sudden stop of capital inflows. a sudden stop scenario is particularly costly since it involves a painful restructuring of the economy from non - tradables to tradables and a large correction in the exchange rate with potentially large balance sheet effects, which could result in high volatility and output losses. this view regarding large capital inflows has largely been shaped by current account crises like the ones in mexico and east asia in the 1990s. as the evidence i showed, the current account in emerging market economies still displays, on average, a surplus. therefore, they do not currently present a serious threat, but it is necessary to explore the policy implications of large capital inflows. 1 here i will discuss briefly the main tools from a macro point of view. for further discussion on these policy options, see de gregorio ( 2010a ). in many experiences capital inflows have been exacerbated by policy actions. most noteworthy are the attempts of authorities to defend an artificially weak currency. the expectations of an appreciation generated by this policy create further incentives for capital inflows. for this reason a flexible exchange rate should be the first line of defense. this is also consistent with

is a lot of recent work on determining which institutions are truly “ systemic. ” 5 what i miss, however, is more discussion on regulation that directly limits the size of institutions. in chile, for example, after a severe financial crisis in 1983 with close to 15 % fall in output, a strong banking law was enacted, which has been improved over the years. there are several legal regulations designed to prevent or reduce the impact of financial distress in large financial institutions. in this field, one of the most important measures considered relates to operations and transactions that may lead a bank to obtain a significant market share. these operations require authorization by the sbif which may also impose conditions to such authorizations. 6 for example, the sbif may require that the effective net worth of the bank or banks involved be more than 8 % and up to 14 % of their risk - weighted assets ; or demand that the limit of the loans granted by a bank to another financial institution be reduced to 20 % of the effective net worth ( section 35, banking law ). concluding remarks the challenges facing emerging market economies are different from those of industrial countries. while the latter struggle with ensuring a sustained recovery from the great recession, the former have to manage a healthy and vigorous process of growth, which is not exempt from tensions. the need of the world to rebalance saving - investment across countries will have as counterpart capital flows adjustments. exchange rate flexibility, avoiding serious misalignments, should help to smooth this process. it is tempting to think that emerging economies did not suffer the financial crisis for having better regulatory framework than industrial ones. however, the issue is somewhat more complicated. in some way, emerging markets enjoyed also less complexities and smaller sized financial systems. for the current level of development and the size of the financial system, regulations appear to have worked fine. but, the challenge is how to allow continued financial development in the context of a solid financial system. for this reason it is very important to learn from mistakes in more mature markets, and to participate and analyze coming changes in the global financial landscape. see imf ( 2010 ), chapter 2, and references contained in it, for a discussion of balance sheet and asset co - movement approaches to determining systemic institutions. actually, the sbif may deny authorization to any bank merger, acquisition of assets of a bank by another banking entity, or taking control of two o more existing banks by the same person or group, or to increase substantially the existing control if the