Kyunghun Kim: This paper investigates the maintenance of economic stability given volatile capital flows, specifically, focusing on the emerging market economies in East Asia. The author argues that emerging market economies (EMEs) are particularly vulnerable to risks and volatilities from volatile capital flows. Thus, EMEs in East Asia need to have macroeconomic policies and safety nets for economic stability. The policies that the author suggests are a flexible exchange rate, an inflation targeting framework, exchange rate management, and reserve accumulation.
The author should proceed carefully regarding the suggested policy on a more flexible exchange rate. Aghion et al. (2009) show that the impact of exchange rate volatility on productivity growth varies with the degree of financial market development. In the case of EMEs, in which the financial market development is relatively lower than the advanced economies, exchange rate volatility could reduce the productivity growth.
Additionally, a more flexible...