Since the 1980s, emerging countries have been urged to welcome foreign capital inflows. The result has often been a pattern of surges, where excessive inflows were followed by damaging “sudden stops” and reversals. What is needed is a strategy that makes use of the potential benefits of...

While the initial certainty and stark simplicity of the Impossible Trinity have fuzzed and softened over time, this idea still holds a powerful sway over analysis of exchange rates and in the policy debate on capital flows. Yet the practical evidence suggests that the constraints on policy...