Publication

This paper examines capital flows in East Asian countries that are receiving more inflow than they can effectively absorb. These capital inflows reflect an ongoing structural disequilibrium: Foreign capital will be attracted by the higher returns and the prospect of currency appreciation. In this environment, the exchange rate will be poorly anchored by fundamentals, which threatens the stability of the financial system. The author outlines several possible policy responses and argues that each will be limited by institutional constraints and administrative capabilities.