The Surge in Capital Inflows to Developing Countries: Prospects and Policy Response

After being excluded from world capital markets during the debt crisis, many developing countries have experienced large capital inflows during the past five years. The challenges that these inflows pose for domestic policy in recipient countries have generated a substantial literature. This article presents an overview of that literature, describing the characteristics of the new inflows, analyzing the policy issues they raise, assessing their causes and likely sustainability, and evaluating potential policy responses. The desirable policy response is tied to characteristics of the flows themselves as well as to the characteristics of the recipient economy.