the multilateral aspects of policies affecting capital flows
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The Multilateral Aspects of Policies Affecting Capital Flows. Karl Habermeier, Assistant Director Mark Stone, Deputy Division Chief Monetary and Capital Markets Department December 20, 2011. Context. Fund is undertaking considerable work on policies affecting capital flows Motivated by: - PowerPoint PPT PresentationTRANSCRIPT
The Multilateral Aspects of Policies Affecting Capital Flows
Karl Habermeier, Assistant DirectorMark Stone, Deputy Division Chief
Monetary and Capital Markets Department
December 20, 2011
Context Fund is undertaking considerable work on
policies affecting capital flows Motivated by:
Greater cross-border interconnectedness Experience of the crisis G-20 and IMFC have called for a
“comprehensive, balanced and flexible approach for managing capital flows”
The current work-stream follows on the view developed at the Fund 10 years ago
Fund capital flow work-stream
The Fund’s role regarding flows (December 2010)
Experiences in managing capital inflows (March 2011)—framework for capital flow management measures (CFMs)
Multilateral aspects (today) Focus on source countries Focus on broad array of policies
Capital outflows and capital acc. liberalization—March 2012
Chapeau paper—mid-2012
Organization of presentation Reconsidering the stylized facts of capital flows
Advanced economy regulation and supervision and global reforms
The impact of advanced economy monetary policy on capital flows
Capital flow management measures
Conclusions and extension of the proposed framework
Organization of presentation Reconsidering the stylized facts of
capital flows Advanced economy regulation and
supervision and global reforms The impact of advanced economy
monetary policy on capital flows Capital flow management measures Conclusions and extension of the
proposed framework
Stylized fact 1: intra-AE gross flows embed potential systemic risks
Previous focus on net flows to EMEs, and on the composition of flows
The recent crisis showed that gross flows between AEs can be destabilizing
Flows to EMEs originate from the same small group of AEs that dominate inter-AE flows
Implication: strong transmission of AE policies
Figure 1. Global Capital Flows1980-2010
Source: World Economic Outlook
-10
-5
0
5
10
-20
-15
-10
-5
0
5
10
15
20
1980 1984 1988 1992 1996 2000 2004 2008
Advanced economiesIn percent of global GDP
Inflows (liabilities, left)
Outflows (assets, left)
-10
-5
0
5
10
-20
-15
-10
-5
0
5
10
15
20
1980 1984 1988 1992 1996 2000 2004 2008
Emerging marketsIn percent of global GDP
Net (right)
-10
-5
0
5
10
-20
-15
-10
-5
0
5
10
15
20
1980 1984 1988 1992 1996 2000 2004 2008
Advanced economiesIn percent of own GDP
-10
-5
0
5
10
-20
-15
-10
-5
0
5
10
15
20
1980 1984 1988 1992 1996 2000 2004 2008
Emerging marketsIn percent of own GDP
Stylized fact 2: Global SIFIs bear directly on the riskiness of capital
flows Volatile bank flows suggests banks did not
internalize the associated risks
Expansion in portfolio flows means a larger share of capital flows outside of regulation
Business model of many G-SIFIs model helped drive an increase in shadow banking and global liquidity
Implication: G-SIFI regulation is important
Stylized fact 3: The volume and volatility of EME capital flows are on
upward trends
Gross EME inflows more volatile
Net EME capital flows remain large
Capital inflows have been trending upwards in EMEs Declines in home bias in AEs Widening growth differentials Financial market development
Implication: transmission of AE policies may get stronger
Figure 2. Volatility in Capital Flows(Coefficient of variation
in percent)
Figure 3. Trends in Gross and Net Flows
(Hodrick-Prescott filtered series, billions of U.S. dollars)
0
20
40
60
1995 1997 1999 2001 2003 2005 2007
Emerging markets
Advanced economies
Coefficient of variation in percent
0
200
400
600
800
1000
1200
1980 1985 1990 1995 2000 2005 2010
Gross inflows
Gross outflows
Sources: World Economic Outlook and staff calculations.
Sources: World Economic Outlook and staff calculations.
Organization of presentation Reconsidering the stylized facts of
capital flows Advanced economy regulation and
supervision and global reforms The impact of advanced economy
monetary policy on capital flows Capital flow management measures Conclusions and extension of the
proposed framework
AE regulation and supervision: motivation
Traditional focus: national microprudential
Limited attention paid to cross-border issues
Crisis showed shortcomings in R&S that transmitted across borders
Paper looks at the recent past, present and future of AE regulation and supervision
AE regulation and supervision: the recent past Five specific cross-border risks not adequately
appreciated by supervisors
1. Foreign exchange liquidity risk—e.g. large European banks, AE banks in Europe EMEs, AIG
2. Counterparty risk—exposure to AIGFP, US MMMFs
AE regulation and supervision: the recent past
3.Indirect exchange rate risk—Fund in FX and lend in FX to borrowers who earn in LC
4.Mortgage market risk—National mortgage market risks transmitted globally
5. Credit concentration risk—Foreign affiliates concentrated in regions
AE regulation and supervision: summary of the
recent past These risks contributed to cross-country
stress and undermined confidence in the global system
Regulatory perimeter is key policy implication
Macroprudential perspective needed
Problem of lack of feedback to large countries undermining their incentives
Box 2 has specific policy recommendations
AE regulation and supervision: the present
Discussion in the paper already a little dated!
Systemic financial stress is on the rise
Low interest rates having subtle effect
Flows are already becoming more unstable
R&S reform urgently needed to mitigate these risks
AE regulation and supervision: the future
Enormous agenda now underway But progress has been mixed This means regulatory arbitrage
opportunities Capital and liquidity requirements Carving out of risky activities Financial markets Supervisory perimeter
Downside reform dynamic must be avoided
AE regulation and supervision: policy
messages Crisis taught us that national R&S
has important multilateral effects Completing national R&S reform is
win-win Complete and implement national
macroprudential frameworks Complete and implement
international architecture reforms Cross-border coordination
Organization of presentation Reconsidering the stylized facts of
capital flows Advanced economy regulation and
supervision and global reforms The impact of advanced economy
monetary policy on capital flows Capital flow management measures Conclusions and extension of the
proposed framework
AE monetary policy: overview
Big issue is whether expansionary US MP increased flows to EMEs after crisis
Channels Interest rate differentials Growth differentials
Literature review: powerful effect Based on pre-crisis Overall effect Differences across investors and types of flows
AE monetary policy: QE impact on long-term interest rates
ZLB prompted Fed and BoE shift to QE to lower long-term yields
QE—Bond purchases for macro purposes
Most empirical analysis based on event studies—QE1 reduced yields by 50 basis points, QE2 smaller
The interest rate effect likely increased capital flows to EMEs
AE monetary policy: other QE channels
QE can narrow growth differentials and thus reduce flows to EMEs
Some model-based evidence of domestic growth effect
Counterfactual of no QE could have led to much sharper world recession
AE monetary policy: conclusion
Weak case for active consideration by central banks of multilateral effects
Clear-cut case when domestic and multilateral objectives coincide
But usually very difficult to assess Issue of mandate of large AE central
banks Fully effective R&S of AEs would help
Organization of presentation Reconsidering the stylized facts of
capital flows Advanced economy regulation and
supervision and global reforms The impact of advanced economy
monetary policy on capital flows Capital flow management measures Conclusions and extension of the
proposed framework
Capital flow management measures: background
CFMs are administrative, tax, and prudential measures designed to influence capital flows
Two flavors: “Capital controls”—discriminate on the basis of residency “Other measures”—do not discriminate on the basis of
residency e.g. some macroprudential measures
Renewed popularity has led to new cycle of work CFMs can effectively manage inflows in a policy package Can have adverse effects domestically Unilateral impact seems to be limited
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onth
1/ The table includes CFMs and related measures used by a sample of countries to cope with capital inflows since 2009Q4 based on an updated version of Table 4 of SM/11/30. A measure or set of measures taken by a country in a particular month is counted as one event.
Figure 4. Capital Flows Management Measures and Related Measures
Source: IMF Country Desks
Capital flow management measures: multilateral aspects
Focus here on CFMs aimed to address inflows
CFM can be expected to reduce asset prices and inflows in the home country
CFMs could transmit multilaterally via capital flows to likewise countries with similar characteristics: Divert flows and increase asset prices and inflows in likewise Reduce flows and decrease asset prices and inflows in likewise
Event studies suggested CFMs can increase or decrease flows to likewise countries
Capital flow management measures: implications
As of today, CFMs seem to have limited implications for the riskiness of flows Modest unilateral effectiveness Inconclusive multilateral transmission Market participants view them as ineffective
Downside risk of CFM proliferation Adverse dynamic (trade wars) Closure of capital accounts limits benefits of
capital flows
Organization of presentation Reconsidering the stylized facts of
capital flows Advanced economy regulation and
supervision and global reforms The impact of advanced economy
monetary policy on capital flows Capital flow management measures Conclusions and extension of the
proposed framework
Extension of policy framework
Bottom line: national authorities should pay more attention to policy transmission, especially prudential
Fund previously proposed framework to address domestic aspects of CFMs for recipient countries
This paper proposed extending framework to help: policymakers understand how risks transmit across
borders promote policy coordination
Extension of policy framework
National supervisors should understand risk cross-border transmission and be prepared to take countervailing measures
National supervisors should have the appropriate capacity and perimeter
Macroprudential policy should account for capital flows, and coordinate across countries
Complete and fully implement the ongoing international architecture reforms
Reaction to paper Broad agreement by Directors on the conclusions
of the paper Discussion of AE monetary policy Discussion of applicability of extension of the framework
Extensive press coverage
Next steps Paper on capital account liberalization Chapeau paper
Questions