The International Monetary Fund (IMF) said on Monday that during the global financial crisis some emerging markets experienced much more stable economy, consumption and unemployment by balancing the yin of capital inflows with the yang of capital outflows.

"Large swings in foreign capital inflows have been less disruptive in countries where they lead to changes in reserves or capital outflows by domestic residents rather than changes in the current account," the IMF said in its latest World Economic Outlook (WEO) report.

The report found three features among resilient emerging markets that had absorbed fluctuations in capital inflows through financial adjustment. The first is stronger institutions, with credible central banks and countercyclical fiscal and monetary policy. The second is stronger financial supervision and regulation. The third is more flexible exchange rate regimes and limited restrictions on capital flows.

Historically, emerging markets have tended to experience disruptive real adjustment. Surge in capital inflows leading to domestic booms and current account deficits is followed by disruptive crises when inflows reversed, which was best exemplified by the 1997 Asian crisis, the report said.

The concepts of yin and yang in Taoism is to emphasize the complementarity, which is to take the "soft" approach to manage capital flows rather than the "hard" one by encouraging capital outflows and limiting inflows, said John Simon, lead author of the report.

Simon said the report is to help policymakers improve prudential regulation, which is the direction China is moving.

The report also found that the conventional wisdom that financial globalization necessarily induces greater output comovement across countries is not true until a global crisis takes place. It means there are potential gains from policy coordination both on the financial and fiscal side.

The size of spillovers depends on where the shock originates. Spillovers from the United States still matter the most from a global perspective, although the euro zone, China, and Japan are important sources of spillovers within their respective regions.

The WEO report was released prior to annual meetings of the IMF and its sister agency World Bank, which are scheduled for October in Washington. The meetings are set to gather central bankers, finance ministers and other experts to discuss key global economic issues and policy actions. Endi

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