Controlling flow of capital

The technical and institutional aspects of organizing a country's external liabilities and assets with the aim of choosing the best possible combination of risk and return consistent with the supply conditions in capital surplus countries. In a situation where all decisions were made by market forces alone, governments would not be involved in deciding how much their countries should borrow from abroad. In reality, governments need to be involved, both because the public sector tends to be the largest borrower and because the prices with which private companies are faced may be distorted by government policies, encouraging the private sector to borrow too much or too little. It is the responsibility of the monetary authorities to ensure the availability of foreign exchange.

Enormous sums sweep across the world's computer screens -- £30,000 million in one day during "Black Wednesday" when dealers forced the pound out of the European Monetary System. This is three time more than the whole of the Bank of England's reserves.

Often governments treat the level of capital inflows as a residual and frame their fiscal and monetary policies independently of their effect on debt level and structure.

At times governments may raise domestic interest rates so as to encourage capital inflows or discourage outflows; in some cases interest rates have been lowered in order to discourage inflows.