Transcript Slide 1

CAPITAL FLOWS AND
MACROPRUDENTIAL
REGULATION
José Antonio Ocampo
Columbia University
CHARACTERISTICS
OF CAPITAL FLOWS
IMF WEO: Capital flows
are erratic (fickle)
 Volatility has increased over time and is higher for
EMEs than for AEs
 Flows towards EMEs are highly sensitive to
monetary policy in AEs, and to risk perception
 Different types of flows differ in terms of volatility
and persistence (though differences have narrowed
down)
 Recent surge is peculiar because of pace rather
than level
Bank and portfolio flows are highly
sensitive to interest/risk mix
3.5
Bank and other
3
Net portfolio debt
Net portfolio equity
2.5
Net FDI
2
1.5
1
0.5
0
-0.5
-1
Low interest,
low risk
Low interest,
high risk
High interest,
low risk
High interest,
high risk
Debt portfolio flows are the distinctive
feature of the recent surge in Latin America
Emerging Asia
Emerging Latin America
4.5
4.5
4
4
3.5
3.5
3
3
2.5
2.5
2
2
1.5
1.5
1
1
0.5
0.5
0
0
-0.5
1991–97
2004–07
FDI Portfolio equity
Portfolio debt
2010 Q1-Q3
Bank and others
-0.5
1991–97
2004–07
FDI Portfolio equity
Portfolio debt
2010 Q1-Q3
Bank and other
Volatility has increased, particularly for FDI.
Persistence is low and has declined.
Volatility
FDI
Portfolio equity
Portfolio debt
Bank and other
FDI
Portfolio equity
Portfolio debt
Bank and other
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
-0.1
1991
2009
2008
2007
2006
2005
2004
0
2003
0
2002
0.1
2001
0.5
2000
0.2
1999
1
1998
0.3
1997
1.5
1996
0.4
1995
2
1994
0.5
1993
2.5
1992
0.6
1991
3
1990
0.7
1990
Persistence
3.5
Some additional features
 Integration into global financial markets is a
integration into a market that is segmented by risk
categories.
 The riskier segments behave in a clearly pro-cyclical
way.
 Segmentation has declined due to reserve
accumulation and development of domestic bond
markets…
 … but these achievements of EMEs have become a
double-edge sword, as they attract capital flows.
 EMEs markets are relatively small  A small
portfolio decision in AEs has major effects on EMEs
Sprea ds
Yi el ds
1-Jul-10
1-Jan-10
1-Jul-09
1-Jan-09
1-Jul-08
1-Jan-08
1-Jul-07
1-Jan-07
1-Jul-06
1-Jan-06
1-Jul-05
1-Jan-05
1-Jul-04
1-Jan-04
1-Jul-03
1-Jan-03
1-Jul-02
1-Jan-02
1-Jul-01
1-Jan-01
1-Jul-00
1-Jan-00
1-Jul-99
1-Jan-99
1-Jul-98
1-Jan-98
Riskier markets are pro-cyclical,
but segmentation has declined
Emerging Markets' Spreads and Yields, 1998-2010
22.0
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Due to massive reserve accumulation …
Foreign exchange reserves (% of GDP)
25%
50%
High income, excluding Japan
Japan
45%
Middle-income, excluding China
Low-income
20%
40%
China
35%
15%
30%
25%
10%
20%
15%
5%
10%
5%
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
0%
1981
0%
… and domestic market development in EMEs
Capital markets in EMEs are small
compared to AEs
Domestic + International
Domestic debt securities (Sept. 2010)
USA
13.6%
11.1%
USA
Other advanced
Other advanced
EMEs
EMEs
33.9%
37.9%
48.5%
55.0%
The current surge: explanations
and paradoxes
 The problem has not been QEs, which has been
unable to increase the money supply in the US…
 … but the interest rate differentials, which will continue
to be with us due to:
 Reduced risk perception regarding EMEs
 Two-speed world economy
 Two paradoxes:
 “Self-insurance” is good for financial stability but
increases the flood of capital
 Domestic financial market development has the same
effect
Monetary base expansion in the US has led to
increasing reserves deposited in the Fed
US Monetary base and non-borrowed reserves (billion dollars)
3,000
2,500
2,000
1,500
1,000
500
Monetary base
Non-borrowed reserves
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
-500
Jan-04
0
The two speed world economy,
which has its mirror in monetary policies
10.0%
8.0%
6.0%
4.0%
2.0%
-4.0%
-6.0%
Developed
Developing
1971-2002
2003-2012
2010
2005
2000
1995
1990
1985
1980
1975
-2.0%
1970
0.0%
Major implications
 Stability of EMEs and free capital movements
may just be inconsistent objectives.
 With structural imbalances in the world
economy, interest rate arbitrage is a source of
instability
 So, global (i.e., not only national) capital
account regulations may be necessary to
manage persistent incentives to interest-rate
arbitrage.
What remains of the advantages
of capital mobility / liberalization?
 Allow countries with limited savings to attract
financing for productive investment
… if countries can manage to run stable current account
deficits; and, in any case, most financing does not lead to
investment.
 Foster the diversification of investment risk
Certainly for source countries; for recipient countries, there
are increased risks
 Contributes to the development of financial markets
This is partly correct, so long as funds are stable
 Access to global capital markets is good, but
capital account liberalization has unclear benefits.
THE POLICY DEBATE
The central policy issues (1)
 Medium-term cycles, not short-term volatility are
the most difficult to manage.
 The reasons are simple:
 Capital flows directly generate pro-cyclical effects
 They also reduce the room of maneuver for countercyclical macroeconomic policies
 Fiscal policy can always be counter-cyclical, but:
 Pro-cyclical financing reduces the room of
maneuver for counter-cyclical fiscal policies.
 Austerity during crises generates pressures to
spend during the recovery, thus a pro-cyclical
dynamics of a political economy character.
The medium-term cycle
Financial flows to LA (% of GDP)
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
-2.0%
-3.0%
-4.0%
Inflows
Net
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
-1.0%
1980
0.0%
The central policy issues (2)
 Monetary/exchange rate autonomy: with free capital
movements, countries may be just choose where
they want the instability of capital flows to be
reflected in the domestic economy.
 Exchange rate flexibility has real costs:
 It can easily lead to overvaluation and a risky growth
pattern.
 It increases the risk of producing tradables = it is a
tax on international specialization (Kindleberger)
 These two issues explain the revealed preference
for intermediate exchange rate regimes.
 But the essential instrument, heavy counter-cyclical
reserve accumulation, also has costs.
Exchange rate regimes: recent
Latin American experience (1)
Coefficient of variation of the real exhange rate, 2004-2011
0.0%
Argentina
Brazil
Chile
Colombia
Guatemala
Mexico
Peru
Uruguay
Bolivia
Costa Rica
Dom. Rep.
Honduras
Nicaragua
Paraguay
Venezuela
Ecuador
El Salvador
Panama
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
21.0%
Exchange rate regimes: recent
Latin American experience (2)
Real appreciation: May 2011 vs. average 2004-11
-10.00
-5.00
0.00
Argentina
Brazil
Chile
Colombia
Guatemala
Mexico
Peru
Uruguay
Bolivia
Costa Rica
Dom. Rep.
Honduras
Nicaragua
Paraguay
Venezuela
Ecuador
El Salvador
Panama
5.00
10.00
15.00
20.00
25.00
30.00
The central policy issues (3)
 Counter-cyclical policies require many more
instruments, indeed more instruments than
objectives, including an acceptable level and
stability of the real exchange rate.
 Counter-cyclical prudential and capital account
regulations are essential ingredients of such policies
(macroprudential framework).
 Thus, they are not measures of “last resort”. They
are essential ingredients of the policy package.
 This is particularly true of capital account
regulations, as they target the major direct source of
shocks.
Macroprudential regulations
 There is a continuum between three types of regulations:
 Strict counter-cyclical prudential regulations (capital,
provisions and/or liquidity)
 Foreign-exchange related prudential measures
 Capital-account regulations (capital management
techniques, capital flow management measures)
 Their use should be based on certain criteria:
 Consistency with characteristics of financial system.
 Effectiveness.
 But this may imply that simple quantity-based regulations
(prohibitions, quantitative limits) may be better, and that
selective policies may be preferable.
 Some operate as “speed bumps” and must be dynamically
strengthened.
 Institutional capacity: it is better to have permanent regimes
that are managed in a counter-cyclical way.
CAPITAL FLOWS AND
MACROPRUDENTIAL
REGULATION
José Antonio Ocampo
Columbia University