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The Capital Inflow "Problem" Revisited

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Executive Summary

For three decades, the predominantly prevailing presumption among economic analysts and financial authorities was that the flow of financial capital would become increasingly freer. More freely flowing capital implied a more important role for international developments in shaping market interest rates (as discussed in Reinhart and Reinhart, 2011) and larger net flows of capital and corresponding current account imbalances. The theory was that market forces leading to changes in relative prices would direct the appropriate flow of resources. This underpinned advice from advanced-economy forums, such as the G-7, and international institutions, such as the International Monetary Fund, and was collectively referred to as the triumph of the Anglo-Saxon model.

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