2010 - A YEAR OF TRANSFORMATION FOR THE WORLD AND FOR ASIA

An Address by Dominique Strauss-Kahn, Managing Director of the IMF
At the Asian Financial Forum
Hong Kong, January 20, 2010
As Prepared for Delivery

".............This means that many emerging market economies will be able to exit from crisis support measures sooner than the advanced economies—with monetary tightening generally preceding fiscal tightening.
The differing speeds in economic recovery have been reflected in the performance of financial markets. As you know, there has been a resurgence in capital flows to emerging markets, with Asia receiving a large part. These flows appear to be driven primarily by fundamentals, reflecting the favorable outlook for these economies. Expectations of future currency appreciation are also playing a role.

The return of capital to emerging markets is generally a positive development. Let us not forget that as the crisis unfolded, there was tremendous concern that these flows would cease altogether, or even reverse. Understandably, however, policymakers in recipient countries are concerned now with how to manage these flows—their impact on exchange rates, domestic demand, financial stability—and the danger of asset bubbles.

What tools can policymakers use to respond to surges in capital flows? In many countries, exchange rate appreciation should be the key response—especially in those where the exchange rate is undervalued based on medium-term considerations. Other policies include lowering interest rates, accumulating reserves, tightening fiscal policy and prudential policies in the financial sector. ..........."

http://www.imf.org/external/np/speeches/2010/012010.htm