Capital Flows, Credit Cycles and Macroprudential Policy

Abstract

In the wake of the Global Financial Crisis (GFC), a considerable number of countries have adopted major changes in their policy frameworks geared towards enhancing financial stability. It is now conventional wisdom that part of the surge in capital flows into emerging market economies (EMEs) was in part a side effect from unconventional policies such as quantitative easing and negative interest rates, which generated a huge amount of global liquidity, as well as low interest rates in advanced economies. These inflows, mostly in the form of portfolio inflows, have in turn led to risks associated with a massive domestic credit expansion in EMEs. These phenomena have raised concerns over potential external imbalances, as well as maturity and currency mismatches between assets and liabilities in the household and corporate sectors.

Full publication: Macroprudential Policy