inflows and outflows stress the markets, they could be dealt by using liquidity providing instruments that are regularly used by central banks. this discussion centers around the main macroeconomic impacts, with a special emphasis on inflation, output, and the exchange rate. however, it is worth noting that, from a financial stability perspective, monitoring requires also paying attention to other effects caused by capital flows. accordingly, important areas to monitor, aside from the behavior of the current account and its counter - entry in the capital account, are asset prices and the evolution of global credit. also important is using macro - prudential measures to complement monetary policies. in any case, the current scenario differs distinctively from other periods of booming capital inflows to emerging economies. for example, in the early 1980s there were massive net capital inflows to latin american countries ( figure 7 ). when it reversed, because of an increase in interest rates in the united states, the debt crisis burst and a period of no capital flows to the region started. 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.

eight months. the outburst of the global financial collapse in september 2008 made us suspend these measures. the evidence at hand indicates that these interventions had an immediate impact on the exchange rate of around 3 %, but on some occasions they also altered its later trend. 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 - a - 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 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. this is another reason to make these interventions only in exceptional circumstances. controls on capital inflows if capital inflows are believed to cause trouble, one solution is to limit them by applying controls. this can be done in economies whose financial systems are not well - developed. as the economy and its financial systems develop, limiting capitals becomes more complex and ineffective, in particular due to difficulties in discriminating which types of flows should be curtailed. also, in economies with high levels of international assets such as chile, it is difficult to control capital inflows because of the need to distinguish between inflows by nonresidents and repatriation of capital by residents.