Despite strong capital inflows, these countries are resorting to a series of measures of unproven effectiveness to address overheating pressures. Capital controls, restrictions on loan-to-value ratios on mortgages, and higher reserve requirements are all stop-gap measures in the face of broader forces.
While these measures will have some impact, ultimately, there are only two possibilities in emerging-market economies: either higher interest rates or higher inflation. The third limit is fiscal stimulus. Reflecting the massive fiscal response and the recession, the International Monetary Fund projects that advanced economy debt will rise from about 80 per cent of GDP in 2008 to 110 per cent by 2015.