Managing capital flows: a distortions approach

Abstract

The East Asian financial crisis has highlighted the challenges that international capital movements pose for domestic economic management. Many of the conditions necessary to maximise the benefits and minimise the risks associated with international capital flows were violated in East Asian economies. In particular, a number of distortions encouraged capital to flow to the wrong investments and with insufficient attention to risk. For economies with open capital accounts, the policy priority must be to remove these kinds of distortions. Where this is not possible in the short term, other policies to influence the capital flows may be desirable.