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Author: Katharina Bergant
Publisher: International Monetary Fund
ISBN: 1513547763
Category : Business & Economics
Languages : en
Pages : 41
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Book Description
We show that macroprudential regulation can considerably dampen the impact of global financial shocks on emerging markets. More specifically, a tighter level of regulation reduces the sensitivity of GDP growth to VIX movements and capital flow shocks. A broad set of macroprudential tools contribute to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky forms of credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macroeconomic stability. These findings on the benefits of macroprudential regulation are particularly notable since we do not find evidence that stricter capital controls provide similar gains.
Author: Katharina Bergant
Publisher: International Monetary Fund
ISBN: 1513547763
Category : Business & Economics
Languages : en
Pages : 41
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Book Description
We show that macroprudential regulation can considerably dampen the impact of global financial shocks on emerging markets. More specifically, a tighter level of regulation reduces the sensitivity of GDP growth to VIX movements and capital flow shocks. A broad set of macroprudential tools contribute to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky forms of credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macroeconomic stability. These findings on the benefits of macroprudential regulation are particularly notable since we do not find evidence that stricter capital controls provide similar gains.
Author: Katharina Bergant
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Author: Ms. Mitali Das
Publisher: International Monetary Fund
ISBN: 1616358343
Category : Business & Economics
Languages : en
Pages : 54
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Book Description
We show that “preemptive” capital flow management measures (CFM) can reduce emerging markets and developing countries’ (EMDE) external finance premia during risk-off shocks, especially for vulnerable countries. Using a panel dataset of 56 EMDEs during 1996–2020 at monthly frequency, we document that countries with preemptive policies in place during the five year window before risk-off shocks experienced relatively lower external finance premia and exchange rate volatility during the shock compared to countries which did not have such preemptive policies in place. We use the episodes of Taper Tantrum and COVID-19 as risk-off shocks. Our identification relies on a difference-in-differences methodology with country fixed effects where preemptive policies are ex-ante by construction and cannot be put in place as a response to the shock ex-post. We control the effects of other policies, such as monetary policy, foreign exchange interventions (FXI), easing of inflow CFMs and tightening of outflow CFMs that are used in response to the risk-off shocks. By reducing the impact of risk-off shocks on countries’ funding costs and exchange rate volatility, preemptive policies enable countries’ continued access to international capital markets during troubled times.
Author: Nicoletta Batini
Publisher: International Monetary Fund
ISBN: 1513569457
Category : Business & Economics
Languages : en
Pages : 70
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Book Description
Abstract In this paper we ask whether countries can influence their exposure to changes in global financial conditions. Specifically, we show that even though we can model cross-country capital flows via a global factor that closely tracks changes in global financial conditions, there is a large degree of heterogeneity in the sensitivity of each country to this same global factor. We then evaluate whether this cross-country heterogeneity can be attributed to different policy choices, including measures of capital flow management, such as capital controls and macroprudential policies. In our main results, we show that higher levels of capital controls and macroprudential policies both dampen the sensitivity to the global factor. Furthermore, we show that countries’ monetary and exchange rate policies can also be successfully deployed. Overall, our results have implications that extend beyond the surge that preceded the 2008 global financial crisis, and that closely resonate in light of the financial disruptions that followed the COVID-19 pandemic.
Author: International Monetary Fund. Fiscal Affairs Dept.
Publisher: International Monetary Fund
ISBN: 1498341713
Category : Business & Economics
Languages : en
Pages : 64
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Book Description
The countercyclical capital buffer (CCB) was proposed by the Basel committee to increase the resilience of the banking sector to negative shocks. The interactions between banking sector losses and the real economy highlight the importance of building a capital buffer in periods when systemic risks are rising. Basel III introduces a framework for a time-varying capital buffer on top of the minimum capital requirement and another time-invariant buffer (the conservation buffer). The CCB aims to make banks more resilient against imbalances in credit markets and thereby enhance medium-term prospects of the economy—in good times when system-wide risks are growing, the regulators could impose the CCB which would help the banks to withstand losses in bad times.
Author: Mr. Anton Korinek
Publisher: International Monetary Fund
ISBN: 1513528378
Category : Social Science
Languages : en
Pages : 35
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Book Description
International capital flows can create significant financial instability in emerging economies because of pecuniary externalities associated with exchange rate movements. Does this make it optimal to impose capital controls or should policymakers rely on domestic macroprudential regulation? This paper presents a tractable model to show that it is desirable to employ both types of instruments: Macroprudential regulation reduces overborrowing, while capital controls increase the aggregate net worth of the economy as a whole by also stimulating savings. The two policy measures should be set higher the greater an economy's debt burden and the higher domestic inequality. In our baseline calibration based on the East Asian crisis countries, we find optimal capital controls and macroprudential regulation in the magnitude of 2 percent. In advanced countries where the risk of sharp exchange rate depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential to mitigate booms and busts in asset prices.
Author: Dongsoo Kang
Publisher: Edward Elgar Publishing
ISBN: 1785369571
Category : Business & Economics
Languages : en
Pages : 328
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Book Description
Recent events, such as capital flow reversals and banking sector crises, have shaken faith in the widely held belief in the benefits of greater financial integration and financial deepening, which are typical in advanced economies. This book shows that emerging economies have often weathered the storm best despite the supposed burden of ‘weak institutions’. It demonstrates that a better policy framework requires reliable indicators of vulnerability to financial instability, as well as improved policy tools and automatic stabilizers that anticipate and limit the vulnerabilities to financial crises.
Author: Maria Arakelyan
Publisher: International Monetary Fund
ISBN:
Category : Business & Economics
Languages : en
Pages : 45
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Book Description
In this paper we assess the effectiveness of macroprudential policies and capital controls in supporting financial stability. We construct a large and granular dataset on prudential and capital flow management measures covering 53 countries during 1996-2016. Conditional on a credit boom, we study the impact of these policy measures on the probability of the credit boom ending in a bust. Our analysis suggests that macroprudential tools are effective from this perspective. If credit booms are accompanied by capital flow surges, in addition to macroprudential tools, capital controls on money market instruments including cross-border interbank lending tend to contribute to reducing the likelihood of a credit bust.
Author: International Monetary Fund. Strategy, Policy, & Review Department
Publisher: International Monetary Fund
ISBN: 1498346693
Category : Business & Economics
Languages : en
Pages : 49
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Book Description
Capital flows can deliver substantial benefits for countries, but also have the potential to contribute to a buildup of systemic financial risk. Benefits, such as enhanced investment and consumption smoothing, tend to be greater for countries whose financial and institutional development enables them to intermediate capital flows safely. Post-crisis reforms, including the development of macroprudential policies (MPPs), are helping to strengthen the resilience of financial systems including to shocks from capital flows. The Basel III process has improved the quality and level of capital, reduced leverage, and increased liquid asset holdings in financial systems. Drawing on and complementing such international reforms at the national level, robust macroprudential policy frameworks focused on mitigating systemic risk can improve the capacity of a financial system to safely intermediate cross-border flows. Macroprudential frameworks can play an important role over the capital flow cycle, and help members harness the benefits of capital flows. Introducing macroprudential measures (MPMs) preemptively can increase the resilience of the financial system to aggregate shocks, including those arising from capital inflows, and can contain the build-up of systemic vulnerabilities over time, even when such measures are not designed to limit capital flows. While the risks from capital outflows should be handled primarily by macroeconomic policies, a relaxation of MPMs may assist, as long as buffers are in place, in countering financial stresses from outflows. Capital flow liberalization should be supported by broad efforts to strengthen prudential regulation and supervision, including macroprudential policy frameworks. The Fund has two frameworks to help ensure that its advice on MPPs and policies related to capital flows is consistent and tailored to country circumstances. The frameworks (the Macroprudential framework and the Institutional View on capital flows) are consistent in terms of key principles, including avoiding using MPMs and capital flow management measures (CFMs) as a substitute for necessary macroeconomic adjustment. The appropriate classification of measures is important to ensure targeted advice consistent with the two frameworks. The conceptual framework for the assessment of measures laid out in this paper will assist staff in properly identifying MPMs and measures that are designed to limit capital flows and to reduce systemic financial risk stemming from such flows (CFM/MPMs), and thereby ensure the appropriate application of the Fund’s frameworks, so that staff policy advice is consistent and well targeted. The Fund will continue to develop and share expertise in using MPMs, and integrate these findings into its surveillance and technical assistance, which should contribute to building international understanding and experience on these issues.
Author: Matteo Ghilardi
Publisher: International Monetary Fund
ISBN: 1498356915
Category : Business & Economics
Languages : en
Pages : 31
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Book Description
This paper develops an open-economy DSGE model with an optimizing banking sector to assess the role of capital flows, macro-financial linkages, and macroprudential policies in emerging Asia. The key result is that macro-prudential measures can usefully complement monetary policy. Countercyclical macroprudential polices can help reduce macroeconomic volatility and enhance welfare. The results also demonstrate the importance of capital flows and financial stability for business cycle fluctuations as well as the role of supply side financial accelerator effects in the amplification and propagation of shocks.
