Since capital flows have become such an emotive topic around the world in recent months, it is important perhaps to recall a few realities. First, that EMEs do need capital flows to augment their investible resources, but such flows should meet two criteria: they should be stable and be roughly equal to the economy’s absorptive capacity.
The second reality that we must remember is that capital flows are triggered by both pull and push factors. The pull factors are the promising growth prospects of EMEs, their declining trend rates of inflation, capital account liberalization and improved governance. The push factors are the easy monetary policies of advanced economies which create the capital that flows into the EMEs.