Macroeconomics for Growth in Emerging Economies

In this article we analyze, first, why funds continued to flow towards emerging economies while fundamentals in host countries had been deteriorating before the Asian crisis (a rising external deficit, with a significant liquid component; appreciating exchange rates; low capital formation, particularly in Latin America), and why funding remains dry for long since 1998; the role of the nature of the predominant agents and of a process of flows rather than one shot building of stock of foreign capital are stressed. Then, the analysis focuses on the interrelations of capital flows and fiscal, monetary and exchange-rate policies. Finally, some policy implications are presented for boom-and-bust stages of cycles led by capital flows.