Abstract

As a response to the latest global economic crisis, advanced country central banks started to implement expansionary monetary policies. In this way, they supported the recovery but at the same time injected abundant amount of cheap liquidity into the world financial system. The result was the surge in capital flows to emerging market (EM) economies. Academic literature shows that ultra loose moneteary policies of US Central Bank in the post crisis period increased capital flows into emerging market countries.

Monetary policy normalization process of US that has already started is expected to affect capital flows to emerging markets. Studies indicate that withdrawal of unconventional monetary policies will lower capital flows to EM’s. In this period, managing expectations through forward quidance is expecially important. In addition, EM policy makers should be aware of declining global liquidity and be cautious in implementing their policies. As abundant and cheap money will gradually dissepear, they should take structural reforms to the forefront of their agendas.