Given the uncertainty surrounding the nature of capital inflows, it would also be prudent for the central bank in small open economies to build up reserves as a cushion against a possible change in investor sentiment, leading to a sudden stop syndrome and the even mare dreaded reversal of capital flows.
In these circumstances, should the Governor sound the alarm bell and seek help from the Minister of Finance? To offset the strong impulse on aggregate demand from the large capital flows, isn’t a hefty dose of fiscal consolidation just what the doctor ordered? Or will the Governor be accused of being a spoilsport in such good and buoyant times?