After QE2, QT2? Quantitative tightening – measures by emerging market countries to counter the sometimes pernicious effects of capital inflows – began even before it became clear that the Federal Reserve was preparing another huge bout of quantitative easing.
Now, with the prospect of yet more money sloshing around the global financial system in search of higher returns, a string of governments in Asia and Latin America are expected to consider introducing capital controls to stem the side effects of inflows.
Emerging markets are affected in several ways by the so-called carry trade, in which money moves from low- to high-interest environments. Such inflows put upward pressure on exchange rates, making exports less competitive, and threaten the possibility of a balance-of-payments crisis if flows suddenly reverse. Inflows also exacerbate inflation.