Now the situation has reversed and many emerging market economies again have net inflows. Managing these flows, especially if they are volatile, will test the effectiveness of central bank policies in semi-open emerging market economies. A country whose central bank does not intervene in the foreign exchange market will incur the cost of currency appreciation unrelated to fundamentals.
If central banks intervene to prevent appreciation, they will have to contend with additional liquidity and potential inflation pressures. If they sterilize (soak up) the resulting liquidity, they run the risk of driving up interest rates, which would hurt growth prospects. Volatility in capital flows could also impair financial stability.