23 Such conditions – which arguably prevailed in the United States from the 1970s to the mid-1990s – could plausibly arise if the central bank has, in the past, allowed significant and persistent movements in inflation to occur. In this case, the temporary rise in the rate of change of import prices results in a permanent increase in inflation.
We need to remind ourselves that until very recently we were in a phase of optimism about the emerging market and developing countries, with plentiful liquidity, and that these conditions could change. At that point we might discover that market and internal fiscal discipline may not be sufficient to prevent problems in the event of a reduction in capital flows to developing countries.