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Abstract
The rapid resumption of capital flows into emerging Asia since mid-2009 has posed two sets of challenges to policymakers in the region. First, although many regional economies are experiencing inflation pressures, policymakers have been reluctant to increase policy rates for fear of attracting more capital inflows. This is in line with previous surges of capital flows to the region, when real policy rates across Asia have on average taken more than 8 quarters to regain their pre-“surge” levels (Figure 2.1). However, as Chapter I discusses, exchange rate appreciation and tighter fiscal policy can play a role in combating overheating pressures, but so must monetary policy.
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