Emerging market economies have also tried to stem the tide through aggressive accumulation of reserves and through imposing taxes on inflows. Brazil imposed an inflow tax of 2 per cent, which was recently increased to 4 per cent. The impact on the exchange rate appears to have been short-lived, while bond rates increased to compensate investors for the tax.
Last week Thailand imposed a 15 per cent withholding tax on non-residents who were previously exempt from this tax on bonds. While we clearly recognise the problem, the solution is not clear-cut. The costs of intervention are not insignificant and involve serious policy choices.