In these circumstances, the counterpart of capital inflows is an increase in the current account deficit. If this phenomenon does not occur facing an abrupt capital inflow increase, it means that capitals are flowing out as well. It is less than evident that, from a mere macroeconomic consistency perspective, gross capital inflows or outflows cause severe disruptions. If in the short run, because of frictions in financial markets, momentary illiquidity or portfolio effects, simultaneous inflows and outflows stress the markets, they could be dealt by using liquidity providing instruments that are regularly used by central banks. This discussion centers around the main macroeconomic impacts, with a special emphasis on inflation, output, and the exchange rate. However, it is worth noting that, from a financial stability perspective, monitoring requires also paying attention to other effects caused by capital flows. Accordingly, important areas to monitor, aside from the behavior of the current account and its counter-entry in the capital account, are asset prices and the evolution of global credit. Also important is using macro-prudential measures to complement monetary policies. In any case, the current scenario differs distinctively from other periods of booming capital inflows to emerging economies. For example, in the early 1980s there were massive net capital inflows to Latin American countries (figure 7). When it reversed, because of an increase in interest rates in the United States, the debt crisis burst and a period of no capital flows to the region started.
Jean-Pierre Roth: The current economic and monetary policy situation Summary of a speech by Mr Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank and Chairman of the Board of Directors of the Bank for International Settlements, at the Centro di Studi Bancari, Vezia, 17 September 2007. The complete speech can be found in French on the Swiss National Bank’s website (www.snb.ch). *  *  *  It is difficult to determine to what extent the turmoil in the US sub-prime mortgage market impacts on the real economy. It has hit Switzerland at a time when our economy is in enviably good shape. Should the situation in the financial markets not deteriorate any further, it is hard to imagine these factors abruptly slowing economic growth. With its decision to let the Libor slide back towards 2.75% in the short term, the SNB has clearly signalled to the markets an easing of the situation. In Switzerland, price stability has been maintained for the past 13 years, economic growth is significantly higher than in the 1990s and our unemployment rate is the lowest of all industrialised countries. It is our goal to preserve this favourable situation. BIS Review 102/2007  1