This brief discussion highlights the correlation between monetary policy cycles in the advanced economies on the one hand and pricing/mispricing of risk and volatility in capital flows on the other hand. At present, monetary policies across the advanced economies have again been aggressively eased and policy interest rates have reached levels even lower than those which were witnessed in 2002.
Base money in the US more than doubled over a period of just six months between June and December 2008. Given such a large monetary expansion and given the past experiences, large capital inflows to the EMEs could resume in the foreseeable future, if the unwinding of the current monetary expansion is not made in a timely fashion.