This paper was prepared by a team led by M. Stone and comprising H. Kang, R. Piazza, T. Saadi-Sedik, M. Singh, C. Verkoren (all MCM) and M. Qureshi (RES) under the guidance of K. Habermeier, with significant inputs from an SPR team comprising V. Chensavasdijai, M. Chivakul, A. Piris, N. Raman, and S. Sanya, led by I. Mateos y Lago under the guidance of A. Husain.
See International Monetary Fund, 2010, “The IMF's Role Regarding Cross-Border Capital Flows,” IMF Policy Paper (Washington: International Monetary Fund), and Baqir, Reza, and others, 2011, “Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy Framework,” IMF Policy Paper (Washington: International Monetary Fund), and Communiqué of the 24th Meeting of the IMFC, September 24, 2011.
Capital flows here refer to the sum of foreign direct investment, portfolio, and other investment flows. Gross flows refer to either the outflow (asset) or inflows (liability) sides of these transactions.
See Marston, David, and others, 2010, "Understanding Financial Interconnectedness," and "Understanding Financial Interconnectedness - Supplementary Information," IMF Policy Paper (Washington: International Monetary Fund).
See N. Cetorelli and L. Goldberg, 2010, “Global Banks and International Shock Transmission: Evidence from the Crisis,” NBER Working Paper No. 15974, May.
See Marston, David, and others, 2010, "Understanding Financial Interconnectedness," IMF Policy Paper (Washington: International Monetary Fund).
See Chapter II of the October 2010 GFSR; and P. McGuire and G. von Peter, “The US Dollar Shortage in Global Banking and the International Policy Response,” Bank for International Settlements, Working Paper 291, October 2009.
See Baqir, Reza, 2011, "Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy Framework,' IMF Policy Paper (Washington: International Monetary Fund), and Chapter 4 of the World Economic Outlook, April 2011.
R. Goyal, C. Marsh, N. Raman, S. Wang, and S. Ahmed, The International Monetary System and Financial Deepening, IMF Staff Discussion Note (forthcoming), 2011.
EME case studies are discussed in more depth in International Monetary Fund, 2011, "Cross-Cutting Themes in Advanced Economies with Emerging Market Banking Links,' IMF Policy Paper (Washington). Conclusions from that paper, which examines the linkages between home and host countries, and draws lessons for mitigating the transmission of macro-financial turbulence, are also reflected in this paper.
The experience of the affiliates of Spanish banks in Latin America offers a useful contrast: they rely more on local financing, and thus were relatively immune to the global funding shock. Similarly, in the Czech Republic, foreign banks financed local lending by issuing local deposits.
Again, the experience of the Spanish banks in Latin America—who undertook limited local lending denominated in foreign exchange—offers a contrast. Czech Republic and Slovakia offer additional examples.
See Background Paper, Part I; and Bayoumi, Tamimi and Trung Bui, 2011, “Apocalypse Then: The Evolution of the North Atlantic Economy and the Global Crisis," IMF Working Paper 11/212 (Washington: International Monetary Fund).
The small literature on the coordination of international supervisory policies suggests both cooperative and noncooperative outcomes are possible (Background Paper, Policy Note II.D).
Stronger and more coordinated financial sector regulation by the large advanced economies core to the global financial system was a main lesson of "Consolidated Spillover Report Implications from the Analysis of the Systemic -5," IMF Policy Paper 2011, (Washington: International Monetary Fund) and, in particular, the U.S. and U.K. spillover reports.
The Fund is playing a leading international role in developing new macroprudential policies. In April 2011, the Board discussed “Macroprudential Policy: An Organizing Framework", IMF Policy Paper 2011 (Washington: International Monetary Fund), followed by “Towards Operationalizing Macroprudential Policies: When to Act?” (Chapter 3, Global Financial Stability Report, September 2011), “Towards Effective Macroprudential Policy Frameworks: An Assessment of Stylized Institutional Models and Macroprudential Policy, ” (Staff Discussion Note and Working Paper, forthcoming), and “Macroprudential Policy: What Instruments and How to Use Them? Lessons from Country Experiences, ” (Working Paper, forthcoming). The next steps will address the identification and monitoring of systemic risk and developing the policy toolkit.
The post-crisis regulatory and supervisory reform agenda is addressed in Viñals, José, and others, 2010, "Shaping the New Financial System," IMF SPN/10/15 (Washington: International Monetary Fund); andViñals, José, and others, 2010, "The Making of Good Supervision: Learning to Say 'No’," IMF SPN/10/08 (Washington: International Monetary Fund).
The European Systemic Risk Board has recommended that home country supervisors reciprocate macroprudential measures taken by host country supervisors.
See also Krishnamurthy, Arvind, and Annette Vissing-Jorgensen, 2011, "The Effects of Quantitative Easing on Interest Rates," Brookings Papers on Economic Activity.
The literature is reviewed in Stone, Mark, Kenji Fujita, and Kotaro Ishi, 2011, "Should Unconventional Balance Sheet Policies be Added to the Central Bank Toolkit? A Review of the Experience So Far," IMF Working Paper 11/145 (Washington: International Monetary Fund).
CFMs encompass a broad range of administrative, tax, and prudential measures that are designed to influence (some or all) capital flows. They comprise: (i) residency-based measures, affecting cross-border financial activity that discriminate on the basis of residency—these are often referred to as capital controls; and (ii) other measures that do not discriminate on the basis of residency, but are nonetheless designed to influence flows, including some macroprudential measures.
Baqir, Reza, and others, 2011, “Recent Experiences in Managing Capital Inflows—Cross-Cutting Themes and Possible Policy Framework,” IMF Policy Paper (Washington: International Monetary Fund).
Habermeier, Karl, Annamaria Kokenyne, and Chikako Baba, 2011,“The Effectiveness of Capital Controls and Prudential Policies in Managing Large Inflows,” IMF SDN/11/14 (Washington: International Monetary Fund).
In theory, global welfare could be improved by a coordinated policy combination of expansionary advanced economy monetary policy coupled with the collective adoption of CFMs by EMEs to counter destabilizing inflows. However, there are a number of practical considerations that may preclude this scenario, in addition to the policy challenges discussed above, including differences in the effectiveness of CFMs across EMEs, relevant constraints for OECD members from its Code of Liberalization of Capital Movements and for members of the EU subject to the Treaty on the Functioning of the European Union, and resistance by vested interests to unwinding CFMs when advanced economy monetary policy tightens.
This could be accompanied by the rise of financial protectionism, for instance prohibitions of foreign ownership of domestic assets or firms may increase, which would limit the benefits of financial globalization.