Increasing Resilience to Large and Volatile Capital Flows—The Role of Macroprudential Policies
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Summary:
Capital flows can deliver substantial benefits for countries, but also have
the potential to contribute to a buildup of systemic financial risk.
Benefits, such as enhanced investment and consumption smoothing, tend to be
greater for countries whose financial and institutional development enables
them to intermediate capital flows safely.
Post-crisis reforms, including the development of macroprudential policies
(MPPs), are helping to strengthen the resilience of financial systems
including to shocks from capital flows. The Basel III process has improved
the quality and level of capital, reduced leverage, and increased liquid
asset holdings in financial systems. Drawing on and complementing such
international reforms at the national level, robust
macroprudential policy frameworks focused on mitigating systemic risk can
improve the capacity of a financial system to safely intermediate
cross-border flows.
Macroprudential frameworks can play an important role over the capital flow cycle, and help members harness the benefits of capital flows.
The Fund has two frameworks to help ensure that its advice on MPPs and policies related to capital flows is consistent and tailored to country circumstances. The frameworks (the Macroprudential framework and the Institutional View on capital flows) are consistent in terms of key principles, including avoiding using MPMs and capital flow management measures (CFMs) as a substitute for necessary macroeconomic adjustment.
The appropriate classification of measures is important to ensure targeted advice consistent with the two frameworks. The conceptual framework for the assessment of measures laid out in this paper will assist staff in properly identifying MPMs and measures that are designed to limit capital flows and to reduce systemic financial risk stemming from such flows (CFM/MPMs), and thereby ensure the appropriate application of the Fund’s frameworks, so that staff policy advice is consistent and well targeted. The Fund will continue to develop and share expertise in using MPMs, and integrate these findings into its surveillance and technical assistance, which should contribute to building international understanding and experience on these issues.
Series:
Policy Papers
English
Publication Date:
July 5, 2017
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