Globalisation and capital flows: Some policy lessons for small countries

The recent financial and economic crises in Asia and Latin America suggest that the combination of a fixed exchange rate policy and free capital mobil ity could be dangerous for small countries. There are many recent examples of speculative attacks on fixed exchange rates, even in Europe. Such attack s are hard to resist due to self-fulfilling expectations. The lesson to be learned is that some capital controls are necessary to support a fixed exch ange rate. Countries outside the European Monetary Union (like Norway) appe ar to have no other choice than a flexible exchange rate. In the policy deb ate, globalisation is sometimes used as an excuse for not reducing structur al unemployment, dampening business cycles and promoting sustainable econom ic growth. It is often taken for granted that national economic policies do not work anymore, but this is not consistent with recent macroeconomic res earch. On the contrary, appropriate national economic policies are essentia l for reducing excessive structural unemployment, generating low inflation and financial stability, and stimulating long-run growth.