This paper considers gains from international economic policy coordination when there is uncertainty concerning the functioning of the world economy but also learning about the "true" model on the part of policymakers. The paper reports estimates of plausible alternative versions of a standard two-country model. Activist policy (either coordinated or uncoordinated) may produce large welfare losses in the absence of learning, if policymakers believe in the wrong model; hence, exogenous money targets and freely flexible exchange rates may be best. However, model learning (from observations on macroeconomic variables) causes coordinated policies to dominate activist uncoordinated policies or exogenous money targets.

We investigate in a sample of 53 emerging markets over 1980-2014 whether countries with open capital accounts are necessarily at the mercy of global events, or are able to take policy actions when receiving inflows to mitigate the impact of a subsequent reversal. Our analysis suggests that, while changes in global conditions have an important bearing on crisis susceptibility, countries that allow the buildup of macroeconomic and financial vulnerabilities during boom times, and which receive mostly debt flows, are significantly more likely to see capital inflow surge episodes end in a financial crisis.

The workhorse open-economy macro model suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging market policy makers, however, believe that inflows lead to credit booms and rising output; the evidence appears to go their way. To reconcile theory and reality, we extend the set of assets in the Mundell-Fleming model to include both bonds and non-bonds. At a given policy rate, inflows may decrease the rate on non-bonds, stimulating financial intermediation and, potentially, output as well. We explore the implications, and find support for the key predictions in the data.