BIS Review 72/2010  9  Figure 6 Interest rate differentials (*) (percentage) 14  14  12  12  10  10  8  8  6  6  4  4  2  2  0  0  -2  -2  07  08 Brazil Mexico  Chile Poland  09  10  Colombia Malaysia  Korean Rep.  (*) Difference between each economy's reference rate and the US Fed Funds rate. Sources: Bloomberg and Central Bank of Chile. Figure 7 Current account balance (percentage of GDP) 8  8  6  6  4  4  2  2  0  0  -2  -2  -4  -4  -6  -6  -8  -8  80  84  88  Emerging economies  92  96  00  Emerging Asia  04  08 LAC - 7 (*)  (*) Simple average for Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. Source: WEO, April 2010. For 2009-2011, estimate and forecast. 10  BIS Review 72/2010  Figure 8 Latin America: Change in international reserves (billions of dollars) 150  150  125  125  100  100  75  75  50  50  25  25  0  0  -25  -25  -50  -50  80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 (f)  (f) Forecast.
It is hard to conceive a general rule governing the use of capital controls to deal with massive capital inflows, but it is certainly more difficult to apply such controls in economies highly integrated to the world markets. Something that the evidence seems to suggest is that capital controls affect mainly the composition of the flows, not necessarily their magnitude. In that case, in order to affect the composition of international liabilities, in particular those intermediated by the banking sector, it would be more efficient to direct the eye toward financial regulation rather than to capital controls. In addition, macro-prudential regulations should be used to mitigate the procyclicality of capital flows. These measures could include BIS Review 72/2010  5  liquidity management policies, for instance imposing differentiated liquidity requirements for short-term and long-term financing flowing to banks or to other financial agents. Final remarks To conclude, we must first emphasize that global financial integration entails extensive benefits, as it allows to smooth expenditure fluctuations and to obtain resources to finance investments in countries with capital shortage. However, we have also learned that capital flows can be destabilizing, particularly when financial systems are fragile and macroeconomic policies inconsistent. Long-lasting boom periods have always presented challenges to macroeconomic policy making. Sadly, the passing from economic boom to a costly recession is a too recurrent experience for emerging economies, especially in Latin America.