For decades, flows to emerging market economies such as the flood of capital from the big, big drop, and so the cycle. Last year, the day the amount of capital, equity investment funds and fixed income investment funds poured into emerging markets again, creating another wave of orgasm because investors believe that these countries have strong macroeconomic policies and financial fundamentals.

Part of this wave of capital inflows driven by short-term cyclical factors (such as interest rate differentials, another example of slow economic growth in developed economies zero interest rate policy, and more quantitative easing, reducing the capital in the profit opportunities in these countries) However, the long-term factors behind can not be ignored, including: emerging markets relative to developed economies have a long-term growth advantage, investors, funds distributed to overseas markets will be more intense, as well as investors in emerging market currencies is expected to name and long-run real exchange rate appreciation.

Therefore, the emerging market is the most severe test of the policy is how to deal with capital inflows – the consequences will inevitably drive the currency appreciation, and a threat to its export-led economic growth.

The first approach is to let it go and let their currencies appreciate. If the capital inflows and exchange rate appreciation driven from the fundamentals (current account surplus, the currency is undervalued, both large and sustained growth in the gap), then perhaps this move is the right choice.

But many times the capital inflow is driven by short-term factors, herd behavior and irrational exuberance, which causes the currency was overvalued, non-traditional export-oriented industries or import-competing industries were diverted to the loss of export competitiveness and, ultimately, large-scale The current account deficit, so that economic growth was more external conditions.

If you allow freedom of appreciation of the currency is costly, then try the second option – Non-hedging foreign exchange intervention. This measure to offset the upward pressure on the very effective, but it will be counter-productive: it will make in the fast-growing emerging economies in serious overheating of the economy and fuel inflation, leading to excessive growth of credit, leading to the risk of asset bubbles.

The third way is to hedge-type intervention. Although this measure can avoid the trouble of money and credit growth, but maintaining a high interest rate differentials, and therefore encourage and carry trade-related capital inflows, but will exacerbate the problem go.

A fourth option is to strengthen controls on capital inflows (or relax controls on capital outflows.) Regardless of the existence of such control “loophole”, there is evidence that control short-term “hot money” inflows does not affect the overall size of capital inflows. Thus, the control measures for reducing the appreciation of the currency short-term cyclical pressure is not effective.

The fifth way is to tighten fiscal policy to reduce budget deficits, thus driving down interest rates, weakening the attraction of foreign capital. But more prudent fiscal policy is likely to improve their external payments position and the sovereign risk rating, so but may attract more capital inflows.

The sixth way is to put the financial system through prudential supervision to reduce the risk of credit and asset bubbles, this approach has been taken, especially in the local hedge-style intervention measures to curb the excessive appreciation of the currencies of countries in the applications. This regulation should aim to curb excessive credit growth (which is caused by exchange rate intervention in the consequences of money growth). Direct control on credit growth although necessary, but often flawed, and not much in practice, and binding.

One way is to take the last large-scale, large-scale hedge style and lasting interventions, that is, using sovereign wealth funds or other financial stability mechanisms to accumulate foreign assets, long-term capital inflows to offset the impact of domestic currency. Support this approach is based on long-term factor is an important driver of capital flows, that is, when the developed economies, investors find themselves investing in emerging market assets ratio is too low, they will reduce the investment portfolio ” home bias. ”

Hedging-style intervention usually does not work: If the developed economies and emerging market assets on both sides are fully interchangeable, then the interest rate differential between the two sides for how long, how long will capital inflows. However, the investor demand for emerging market assets is not unlimited, and they can not completely replace the assets of the developed economies – even if there is a specific difference in interest rates – because of two assets, liquidity and credit risk varies significantly.

This means that, at some point, large-scale, continuous hedge foreign exchange intervention (a few percentage points to GDP) will meet the market demand for emerging market assets, so that capital inflows stop, even if interest rate differentials still exist. Because hedge of foreign intervention in domestic assets will lead to release, so it can meet the needs of global investors to diversify investments while, it will not lead to excessive currency appreciation, thereby causing indirect harm to emerging markets.

Of course, we can not completely prevent currency appreciation. If you have the support of economic fundamentals, they should allow their currencies to gradually appreciate. However, if the appreciation of the power to free investors to diversify assets in developed economies due to capital inflows preferences, then they should be resisted.

Author Bio: I am a professional editor from China Mp3 Player,and my work is to promote a free online trade platform. http://www.qualitymp3player.com/ contain a great deal of information about womens lee jeans,refill toner kit,soil moisture meter,welcome to visit!

Category: Business
Keywords: womens lee jeans,refill toner kit,soil moisture meter,