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BPEA Article

Capital Flows to Developing Economies: Implications for Saving and Investment

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Abstract

THE CURRENCY CRISES that broke out in East Asia in mid-1997 have been
followed by more than a year of tumult in international financial markets.
These crises have had a serious impact on the emerging market economies,
forcing many to raise domestic interest rates so as to stem an outflow of
financial capital and prevent further exchange rate collapse. These interest
rate increases have, in turn, depressed domestic economic activity.
Not surprisingly, this severe financial instability has intensified discussions
about the benefits and risks to developing economies from allowing capital
to flow freely across national borders.

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