Introduction:

It is trivial to state that economic globalization severely limits the nation state's capacity to pursue policies of its own. However, the search for concepts and analytical tools to describe and evaluate this limited yet not inexistent policy space at the national level is much less self-evident.

On the one hand, standard economic theory and policy advice, at least for a long time, have assumed that there exists a standard set of policies to be pursued if a country is in crisis (e.g. Williamson 1990). This highly voluntarist approach of an optimal economic policy assumes that problems on the way to a sustainable growth path should be explained by domestic policy failures. From a purely orthodox perspective, the usual suspects of this failure would be an inadequate monetary policy, insufficient fiscal adjustment, or structural reforms which fail to reach deep enough.

It is true that more recently, relevant work even within the economic mainstream has started considering external factors as a severe constraint for standard domestic policies. Especially high and volatile international capital flows have been a topic of analysis for their destabilizing effects on the exchange rate and the financial sector of countries receiving inflows.