But the main problem faced by emerging countries which chose a free float is how the rate would behave in the face of the large and volatile capital flows which these countries experienced in the 1990s. In due course, these flows seem likely to resume for many, if not all, of the countries which experienced them in the 1990s.
They are driven by two powerful factors. First, the desire for diversification on the part of the managers of the huge stock of investment funds in America and Europe, whose weight of foreign assets is well below the theoretical desideratum. Secondly, by the intrinsically high profit prospects in the Asian emerging countries (more on this later).