In the aftermath of the global financial crisis, capital flows into emerging and developing economies have bounced back quickly from their slump in 2008. This has been triggered by prospects of strong output growth, investors regaining their appetite for risk, and, in particular, by ‘carry trade’ practices favoured by the exceptionally low interest rates in developed countries.

This surge in foreign capital has led to a renewed focus on capital controls, a policy option to manage large inflows additional to exchange rate policy, monetary policy, fiscal policy, foreign exchange market intervention and domestic prudential regulation. The debate on the causes and effects of global imbalances and associated capital flows lies at the heart of current G-20 deliberations.