International experience confirms, time and again, that increases in capital inflows have ended invariably in sudden stops and even reversals. This can occur even if internal financial imbalances are not generated, for reasons that have nothing to do with the recipient country, as can be the case with the anticipation of tighter monetary conditions and an increase in global risk aversion.
Independently of possible causes, capital flow reversals tend to depress asset prices and bring cuts in aggregate spending with adverse effects on economic activity. The impact is magnified by the simultaneity of these events in many economies and the frequently leveraged nature of the institutions that finance the flows. Domestically, debtors and savers with exposure to interest rate risk can suffer considerable damage.