From the Editor

• Author: Ian S. McDonald
• Position: Editor-in-Chief

Recent financial crises have sparked considerable debate about the benefits and possible risks of international capital flows. While foreign direct investment (FDI) is generally considered favorably, other flows of capital are viewed with some suspicion. In our first article, Deepak Mishra, Ashoka Mody, and Antu Panini Murshid take a look at the relationship between capital flows and investment, their links with growth, and the impact of the volatility of flows on growth. They conclude that even though capital flows can impose costs, when harnessed effectively they can boost investment and spur growth. Prakash Loungani and Assaf Razin strike a cautionary note in their article, observing that although there is strong evidence that FDI benefits countries, they should assess its potential impact realistically. Although capital flows to developing countries can provoke the most controversy, they are dwarfed by flows to industrial countries. Reint Gropp and Kristina Kostial look at one issue that may be critical in the debate-governments' ability to tax the mobile capital of multinational enterprises.

The new U.S. administration came to office announcing its commitment to tax cuts. In a Point of View article, Ronald McKinnon of Stanford University looks at some of the possible consequences of this policy, both domestically and in terms of its impact on the U.S. current account deficit.

What is termed the "bipolar view" of exchange rates-that countries should move from crisis-prone "soft" pegs for their currencies to either hard pegs or floating regimes-is examined by Stanley Fischer, who concludes that this trend is likely to continue both for countries...