6 Consistency with the “impossible trinity” theorem requires that countries sustaining a high degree of exchange rate stability have to be either relatively closed to international capital flows or have little need for a domestic oriented monetary policy that diverges strongly from the stance taken in advanced economies. Let me quickly review the evidence on both dimensions.
Financial integration At first glance, the process of emerging market economies’ financial integration seems to have continued unabated. After a temporary slowdown following the crises of the late 1990s, gross private capital inflows have picked up significantly in recent years. In 2007, they reached unprecedented levels, both in absolute US dollar terms and expressed as a share of GDP (Cardarelli et al 2007).