I will first refer to some stylized facts and factors behind the recent surge in capital inflows, and then on the policy challenges. Monetary policy in the developed world has had to take on the burden of cyclical stimulus. Hence, policy interest rates in the main high-income economic zones have been kept low for longer than expected at the end of last year, and several central banks have actually reinforced traditional monetary policy with further unconventional measures. The discussion about exit strategies has morphed into further balance-sheet stimulus, and markets are pricing-in that monetary accommodation will continue well into 2011. In contrast to the situation in the largest developed economies, emerging markets and some financially-stable developed countries have transited to a quick recovery phase, which in some cases is leading to above-trend growth and the fast closure of output slack. Macroeconomic policy has responded accordingly, first through the normalization of extraordinary liquidity and financial stability measures, then by moderating their fiscal and monetary impulses. Interest rates in emerging economies have, therefore, started to increase and are, according to most expectations, slated to continue increasing over the course of the next few years. These monetary policy trends have naturally led to discussions regarding their implications for capital flows, current accounts, economic growth, and real exchange rates. In particular, some concerns have been voiced about the risk of returning to a situation much like the one observed in the mid 2000s, when low interest rates in the developed world boosted capital flows into emerging economies.
BIS central bankers’ speeches  1