A string of governments in Asia and Latin America are expected to consider introducing capital controls to stem the side effects of inflows that will increase due to QE2. These emerging markets would be affected by so-called carry trade, in which money moves from low- to high-interest environments. Such inflows put upward pressure on exchange rates, making exports less competitive, and threaten the possibility of a balance-of-payments crisis if flows suddenly reverse. Inflows will also exacerbate inflation.
Capital controls include the introduction of taxes on capital inflows, such as imposing a withholding tax on capital gains and interest payments for government and state-owned company bonds. There are also measures imposed to encourage outflows like the removal of limits on overseas investment and eased restrictions on lending to foreign borrowers.
All these measures are no longer objected by the IMF. Policies that stem excessive capital flows are now considered prudent.
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