International Financial Spillovers: Policy Responses and Coordination

8 Pages Posted: 7 Oct 2014

Date Written: August 1, 2014


The monetary and exchange rate policies of some economically significant countries – especially those whose currencies are accepted as international reserves – have large external effects over the rest of the countries who must take great care in designing their domestic policies to address changes in external conditions. We have seen in recent years that a significant portion of the financial spillovers resulted from the impact on global risk aversion and the evolution of commodity prices – which show a negative correlation with emerging economies (EEs) sovereigns amplifying business cycles.

In spite of having more sensitivity to financial volatility, after the outbreak of the subprime crisis, most (EEs), remained relatively unharmed due the implementation of policies characterized by more flexible exchange rate regimes; commercial surpluses; sound fiscal policies; less dependence on capital flows; more solid financial systems; abundant levels of international reserves; and macroprudential policies to avoid the negative impact of short-term capital flows. That was the case of Argentina that before the 2007 ́s outburst implemented a policy scheme which included a reserve requirement for short-term financial capital flows, regulations on capital outflows and inflows and a currency-managed float regime aimed at moderating exchange rate volatility and avoiding a leveraging process. It also included an international reserves accumulation precautionary policy, accompanied by an adequate sterilisation of any surplus resulting from monetary issues.

The recent global reversal of short-term capital flows has confirmed once again that even when the appetite for EE risk is a function of both international (push) and domestic (pull) factors, the former have a decisive weight. In fact, there is a strong asymmetry between, on one hand, the spillover effects from monetary policy in major advanced economies and, on the other, the focus strictly on domestic fundamentals. Thus, attributing capital surges and sudden stops in EEs to internal (pull) factors is a view that can be considered at least misleading, especially in the case of short-term flows.

In the current scenario, monetary policy coordination between EEs and advanced economies is essential to avoid the potentially deleterious effects of abrupt changes in short-term flows and the potential side effects of the first stages of tapering and should play a key role in facilitating a timely and smooth exit from expansionary and unconventional monetary policies in order to avoid jeopardising the global economic recovery. Capital flow reversal and greater financial and exchange rate volatility could cause a tightening of domestic demand and thereby affect economic activity. A good example of international coordination was seen in 2009 when, in the G20 framework, the IMF issued two rounds of Special Drawing Rights (SDRs), and in the currency swaps agreements signed among trading partners to enhance trade and financial cooperation.

Full publication: The Transmission of Unconventional Monetary Policy to the Emerging Markets

Keywords: Central Banks and their policies, international financial policy, financial transactions, capital controls, international policy coordination and transmission

JEL Classification: E58, F38, F42

Suggested Citation

Pesce, Miguel Angel, International Financial Spillovers: Policy Responses and Coordination (August 1, 2014). BIS Paper No. 78e, Available at SSRN:

Miguel Angel Pesce (Contact Author)

Central Bank of Argentina

Reconquista 266
Edificio Central, piso 7
Buenos Aires, 1003
United States

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