Globalization and economic liberalization promised developing countries improved opportunities for capital investment and, in turn, accelerated economic development. These promises helped cultivate a rush across the developing world to create favorable conditions for capital investors. Increased inward capital flows did occur but frequently retreated rapidly, helped spark systemic volatility and, for many countries, ultimately resulted in a disappointing development record (Rodrik and Subramanian 2008). By the turn of the millennium, there emerged a strong sense that the interests of capital investors and national economic development could diverge and even oppose one another. Governments increasingly saw global capital markets as a potentially destructive force and sought ways to manage the perils of modern financial capitalism.

Today's enlarged, mobile and powerful global capital markets present policymakers with a tightrope. These markets can undermine development efforts as easily as they help, but there are many means by which governments can insulate their economies from these adverse effects. This chapter focuses on how governments can manage capital markets strains with a special focus on monetary policy. Strains occur when there is a rapid or sustained flight of resources from a national economy, which can create a range of policy problems when it occurs, including currency devaluation, inflation, government insolvency and bankruptcy epidemics. When a monetary system becomes especially unstable, it can hurt economic prosperity and, in extreme cases, undermine general political-economic order.