Once relaxed, exchange and capital controls are both difficult and costly to reintroduce, and even relatively modest steps back from an open regime can be damaging to confidence and credibility, without buying much in the way of lasting stability. The policy responses to the challenges that come with economic and financial integration principally involve choices for governments at the national level. International cooperation can in some circumstances help provide a more supportive environment, but there are no feasible changes to the architecture of the international financial system that offer the prospect of a durably stable external economic and financial environment for nations, large or small. Fundamentally, the only realistic choice for policymakers is to equip their economies with the flexibility to cope more successfully in this increasingly integrated global economy. And this means preparing for a world of more rather than less flexibility in exchange rate regimes. Thank you. BIS Review 44/2007  3
Yet, looking back, the crisis also has its silver linings: the painful adjustments that followed prompted governments to strengthen economic fundamentals, enhance banking systems, deepen local bond markets, and build up foreign reserves to cope with potential external shocks. Because of these developments, the region has been able to emerge from the recent global financial crisis relatively unscathed and is now one of the key driving forces supporting the global economic recovery. 5. But we cannot afford to be complacent, as we are now confronted with a new round of challenges in uncharted waters. The unprecedented monetary easing in the advanced economies has led to global excess liquidity. And with the robust recovery of the emerging  BIS central bankers’ speeches  1  markets, there are powerful push and pull factors driving investors to search for yields in developing economies including Asia. From Q3 2009 to Q4 2010, the net capital inflows to emerging Asia1 amounted to $ bn, the largest inflows in recent years. 6. The strong capital inflows and resultant abundant liquidity have led to exchange rate appreciation, fuelled credit growth and driven up asset prices in the region. With output gaps closing, inflationary pressures are accelerating in a number of Asian economies. Capital flows also complicate the macroeconomic policy responses. While exchange rate appreciation and monetary tightening could theoretically cool down the economy, in practice, they may attract even more speculative inflows to profit from interest rate arbitrage and currency appreciation. 7.