This chapter examines how emerging markets typically respond to capital inflows in practice. Confronted by an inflow surge, national authorities respond through a combination of policy instruments—both macroeconomic tools and less orthodox measures. While the thrust of the policy responses across countries is largely the same, there are differences in the specific instruments deployed that likely depend on economic, historical, and institutional characteristics. Central banks seem to use the policy interest rate to address inflation and overheating concerns associated with capital inflows, and to reduce currency appreciation. Most emerging market central banks intervene quite heavily in the face of inflows, nearly always sterilizing that intervention. Finally, emerging market economies also seem to be using capital controls and macroprudential measures in the face of large inflows, but capital controls appear less frequently, often acting as a backstop to other measures.
Facing the Quadrilemma: Taylor rules, intervention policy and capital controls in large emerging markets
