controls. [ for example, deposits from non - resident indians, which are an important source of capital flows into india, are controlled through the interest rates banks can offer, a price variable. external borrowing by indian corporates is controlled through both quantity and price variables. ] bis central bankers ’ speeches • our experience has been that while quantity controls are more effective in the shortterm, they can also be distorting, inefficient and inequitable. capital controls vs prudential measures • there is also an argument about whether capital controls can be substituted by prudential measures. • it is not clear that they are always exact substitutes. if capital inflows are intermediated through the banking system, then prudential measures can be applied directly on domestic banks, circumventing the need for controls. • but what if the inflows are direct, that is to say, loans directly from foreign entities to domestic companies? in that case, the only mechanism to prevent excessive leverage, and foreign exchange exposure, may be by imposing controls. against that backdrop, the questions on capital controls as a short - run stabilization tool are the following : ( i ) can we define the distortion that capital controls are meant to correct? for example, how do we determine if capital flows are excessive or dangerous? ( ii ) what have we learnt about the effectiveness of capital controls as a stabilization tool? ( iii ) when can prudential measures be substituted for capital controls? ( iv ) what criteria should we adopt to choose between price based and quantity based controls? ( v ) are capital controls symmetric as between inflows and outflows? in other words, should we use one type of controls to control inflows and another type to limit outflows? iii. foreign exchange intervention • the third important issue on which the pre - crisis consensus has dissolved is foreign exchange intervention. • the pre - crisis consensus, at any rate among advanced economies, was that intervention in the forex market is sub - optimal. • that consensus no longer holds, with even some advanced economies defending their currencies from the safe haven impact. • emerging markets, for their part, have had long and varied experience of struggling with forex intervention. the policy dilemma in the event of receiving capital flows, beyond the country ’ s absorptive capacity, can be quite complex. • if you didn ’ t intervene in the forex market, then you would have currency appreciation

the economy. another similarity is the medium - term perspective rather than short - term activism. this in turn calls for a forward - looking perspective when the instrumental rate is set. a further resemblance is that in the riksbank ’ s strategy, monetary policy reacts systematically, though neither automatically nor mechanically ; this helps households and firms to base their expectations of inflation on a monetary policy that is predictable. we have followed our rule of action relatively closely, as is evident from diagram 1. 1. actual and estimated repo rate estimates with a simple forecast - based rule it = 1. 29 + 0. 66it - 1 + 0. 50 ( πft, 1 – 2 ) + 0. 26 ( πft, 2 – 2 ) + et source : the riksbank diagram 1, published in our latest inflation report, shows the actual path of the repo rate and estimations obtained with a simple forecast - based rule. it seems that on the whole, our actions can be explained fairly well by applying an equation based on the riksbank ’ s own series of forecasts of inflation one to two years ahead plus a term for the repo rate ’ s “ inertia ”. considering the rule ’ s simplicity, the deviations from it must be said to be small. the diagram accordingly shows that the riksbank ’ s actions have been reasonably systematic and based on the bank ’ s inflation forecasts. it is, of course, too early for a more thorough evaluation of explicit inflation targeting regimes compared with other monetary policy strategies. it is also the case that taylor rules, albeit in a somewhat modified form, likewise give comparatively good explanations for a number of central banks that have not explicitly adopted an inflation target, for example deutsche bundesbank and the u. s. federal reserve. thus, there are similarities between the strategies of these central banks and inflation targeting regimes. if the differences are greater rhetorically than in practice, it is therefore difficult to establish that one of the arrangements has performed better or worse than the others. diagram 2 presents the variations in growth and inflation for a number of industrialised countries in two periods. one is the years from 1970 to 1990, when central bank policy – except in germany and switzerland – tended to concentrate excessively on stabilising employment and demand instead of aiming to maintain price stability in the medium term. in a majority of these countries the transition to a stability - oriented monetary policy had at least not been completed. by the time