Currency Wars: What do effective exchange rates tell us?

In November, South Korea joined the ranks of countries striving to limit the upwards pressure on their currency when two lawmakers submitted a parliamentary proposal to impose various taxes on foreign capital inflows and outflows. If any of these measures pushes through, South Korea would become the first (traditionally financially liberalised) OECD country to reinstate capital controls. This brings the list of countries intervening directly, indirectly or considering intervention to more than 23. This is an unwelcome and disturbing, but hardly surprising, development: as policy rates in the US are at near-zero levels and monetary policy is geared towards managing the yield curve in order to meet domestic objectives, emerging countries throughout the world are scrambling to protect themselves from the negative spillovers in the form of massive capital inflows...