Inflows and Outflows of Capital: Do They Affect You?

Vast capital inflows can harm economies in several ways. Not only can they inflate asset bubbles and spur excessive borrowing, but they can also cause a steep rise in the exchange rate, damaging the competitiveness of export sectors. If a country already has a current-account deficit this will make it even more vulnerable to a quick reversal of capital. On the other hand, if central banks intervene to hold down their currencies, the build-up of reserves can lead to excessively loose monetary conditions and rising inflation.