Emerging markets can better resist capital flow volatility by taking measures to encourage their residents to invest abroad in good times and repatriate the funds when needed, according to a study by the International Monetary Fund.
Countries where a surge of capital inflows was offset by domestic residents’ purchase of foreign assets fared better during the global financial crisis as international investors pulled out, the IMF said in a chapter of its World Economic Outlook released today. That showed policy makers have other options than capital controls or currency interventions, it said.
The fund’s advice comes as countries from India to Indonesia brace for weaker capital flows once the U.S. Federal Reserve phases out its monetary stimulus. The Fed’s surprise decision earlier this month not to pare its $85 billion in monthly asset buying for now is leaving these nations time to address domestic economic fragilities.