Policymaking from a 'Macroprudential' Perspective in Emerging Market Economies

24 Pages Posted: 6 Jun 2011

Date Written: January 2011

Abstract

Recurrent capital inflows pose important challenges for authorities in emerging market economies seeking to preserve financial stability. Raising interest rates to dampen imbalances that could arise from capital flows can also attract more capital inflows and accentuate appreciation pressures. For this reason authorities have used a number of instruments to mitigate the effects of capital flows, all with financial stability implications. Many of these instruments (eg reserve requirements) may have been used for other purposes but the global financial crisis has raised interest in examining them from a financial stability, or "macroprudential" perspective. This paper reviews some of these instruments, drawing in part on material provided by central banks to the BIS. The instruments include foreign exchange market intervention and foreign reserve accumulation; measures to strengthen bank balance sheets and capital and measures to maintain the quality of credit or to influence credit growth or allocation, and capital controls. Certain implementation issues are also discussed, including signals to respond to, timing of prudential measures and procyclicality and effectiveness and calibration. An unresolved question is how the instruments described are to be used in conjunction with interest rate policy. Over the medium term, these instruments raise concerns because they may impair the development of the financial system.

Keywords: capital flows, monetary policy, macroprudential

JEL Classification: E44, E58, E61, F31, F32, F41

Suggested Citation

Moreno, Ramon, Policymaking from a 'Macroprudential' Perspective in Emerging Market Economies (January 2011). BIS Working Paper No. 336, Available at SSRN: https://ssrn.com/abstract=1858690 or http://dx.doi.org/10.2139/ssrn.1858690

Ramon Moreno (Contact Author)

Self employed ( email )

Basel
Switzerland

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