Capital inflows help relax the foreign exchange financing constraint of the domestic economy. For this reason, they can have a positive impact on the external accounts, contribute to liquidity expansion and help lower domestic interest rates. However, policymakers will also need to be prepared to face the possibility of exchange rate appreciation and increased liquidity growth, along with associated concerns.
Some believe that the Federal Reserve can speed up the recovery by keeping the federal funds rate near zero, where it has been for nearly two-and-a-half years, and by promising to keep it there for an extended period.