Transcript The Multilateral Aspects of Policies Affecting Capital

The Multilateral Aspects of Policies Affecting
Capital Flows
Karl Habermeier, Assistant Director
Mark Stone, Deputy Division Chief
Monetary and Capital Markets Department
December 20, 2011
Context
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Fund is undertaking considerable work on
policies affecting capital flows
Motivated by:
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Greater cross-border interconnectedness
Experience of the crisis
G-20 and IMFC have called for a “comprehensive,
balanced and flexible approach for managing
capital flows”
The current work-stream follows on the view
developed at the Fund 10 years ago
Fund capital flow work-stream
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The Fund’s role regarding flows (December 2010)
Experiences in managing capital inflows (March 2011)—
framework for capital flow management measures (CFMs)
Multilateral aspects (today)
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Focus on source countries
Focus on broad array of policies
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Capital outflows and capital acc. liberalization—March 2012
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Chapeau paper—mid-2012
Organization of presentation
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Reconsidering the stylized facts of capital flows
Advanced economy regulation and supervision and
global reforms
The impact of advanced economy monetary policy on
capital flows
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Capital flow management measures
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Conclusions and extension of the proposed framework
Organization of presentation
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Reconsidering the stylized facts of capital
flows
Advanced economy regulation and
supervision and global reforms
The impact of advanced economy
monetary policy on capital flows
Capital flow management measures
Conclusions and extension of the
proposed framework
Stylized fact 1: intra-AE gross flows
embed potential systemic risks
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Previous focus on net flows to EMEs, and on the
composition of flows
The recent crisis showed that gross flows between AEs
can be destabilizing
Flows to EMEs originate from the same small group of
AEs that dominate inter-AE flows
Implication: strong transmission of AE policies
Figure 1. Global Capital Flows
1980-2010
20
Advanced economies
In percent of global GDP
10
15
10
10
5
10
Net (right)
5
5
0
0
-5
0
0
-5
-10
-5
Outflows
(assets, left)
-20
-10
-10
Advanced economies
In percent of own GDP
-5
-15
-20
1980 1984 1988 1992 1996 2000 2004 2008
20
Emerging markets
In percent of global GDP
15
Inflows
(liabilities, left)
5
-15
20
-10
1980 1984 1988 1992 1996 2000 2004 2008
10
20
15
Emerging markets
In percent of own GDP
10
15
5
10
5
10
5
5
0
0
-5
0
0
-5
-5
-10
-15
-10
-5
-15
-20
-10
1980 1984 1988 1992 1996 2000 2004 2008
Source: World Economic Outlook
-20
-10
1980 1984 1988 1992 1996 2000 2004 2008
Stylized fact 2: Global SIFIs bear directly
on the riskiness of capital flows
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Volatile bank flows suggests banks did not
internalize the associated risks
Expansion in portfolio flows means a larger share of
capital flows outside of regulation
Business model of many G-SIFIs model helped drive
an increase in shadow banking and global liquidity
Implication: G-SIFI regulation is important
Stylized fact 3: The volume and volatility of
EME capital flows are on upward trends
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Gross EME inflows more volatile
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Net EME capital flows remain large
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Capital inflows have been trending upwards in
EMEs
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Declines in home bias in AEs
Widening growth differentials
Financial market development
Implication: transmission of AE policies may get
stronger
Figure 2. Volatility in Capital Flows
(Coefficient of variation
in percent)
Figure 3. Trends in Gross and Net Flows
(Hodrick-Prescott filtered series,
billions of U.S. dollars)
Coefficient of variation in percent
1200
Emerging markets
60
Gross inflows
1000
Advanced economies
Gross outflows
800
40
600
400
20
200
0
1995
1997
1999
2001
2003
2005
2007
Sources: World Economic Outlook and staff
calculations.
0
1980
1985
1990
1995
2000
2005
Sources: World Economic Outlook and staff
calculations.
2010
Organization of presentation
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Reconsidering the stylized facts of capital
flows
Advanced economy regulation and
supervision and global reforms
The impact of advanced economy
monetary policy on capital flows
Capital flow management measures
Conclusions and extension of the
proposed framework
AE regulation and supervision: motivation
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Traditional focus: national microprudential
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Limited attention paid to cross-border issues
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Crisis showed shortcomings in R&S that
transmitted across borders
Paper looks at the recent past, present and
future of AE regulation and supervision
AE regulation and supervision:
the recent past
Five specific cross-border risks not adequately
appreciated by supervisors
1. Foreign exchange liquidity risk—e.g. large
European banks, AE banks in Europe EMEs, AIG
2. Counterparty risk—exposure to AIGFP, US MMMFs
AE regulation and supervision:
the recent past
3. Indirect exchange rate risk—Fund in FX and lend in
FX to borrowers who earn in LC
4. Mortgage market risk—National mortgage market
risks transmitted globally
5. Credit concentration risk—Foreign affiliates
concentrated in regions
AE regulation and supervision:
summary of the recent past
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These risks contributed to cross-country stress and
undermined confidence in the global system
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Regulatory perimeter is key policy implication
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Macroprudential perspective needed
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Problem of lack of feedback to large countries
undermining their incentives
Box 2 has specific policy recommendations
AE regulation and supervision:
the present
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Discussion in the paper already a little dated!
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Systemic financial stress is on the rise
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Low interest rates having subtle effect
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Flows are already becoming more unstable
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R&S reform urgently needed to mitigate these risks
AE regulation and supervision:
the future
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Enormous agenda now underway
But progress has been mixed
This means regulatory arbitrage opportunities
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Capital and liquidity requirements
Carving out of risky activities
Financial markets
Supervisory perimeter
Downside reform dynamic must be avoided
AE regulation and supervision:
policy messages
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Crisis taught us that national R&S has
important multilateral effects
Completing national R&S reform is win-win
Complete and implement national
macroprudential frameworks
Complete and implement international
architecture reforms
Cross-border coordination
Organization of presentation
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Reconsidering the stylized facts of capital
flows
Advanced economy regulation and
supervision and global reforms
The impact of advanced economy
monetary policy on capital flows
Capital flow management measures
Conclusions and extension of the
proposed framework
AE monetary policy: overview
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Big issue is whether expansionary US MP increased
flows to EMEs after crisis
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Channels
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Interest rate differentials
Growth differentials
Literature review: powerful effect
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Based on pre-crisis
Overall effect
Differences across investors and types of flows
AE monetary policy: QE impact on
long-term interest rates
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ZLB prompted Fed and BoE shift to QE to lower
long-term yields
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QE—Bond purchases for macro purposes
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Most empirical analysis based on event studies—
QE1 reduced yields by 50 basis points, QE2
smaller
The interest rate effect likely increased capital
flows to EMEs
AE monetary policy: other QE
channels
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QE can narrow growth differentials and
thus reduce flows to EMEs
Some model-based evidence of domestic
growth effect
Counterfactual of no QE could have led to
much sharper world recession
AE monetary policy: conclusion
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Weak case for active consideration by
central banks of multilateral effects
Clear-cut case when domestic and
multilateral objectives coincide
But usually very difficult to assess
Issue of mandate of large AE central banks
Fully effective R&S of AEs would help
Organization of presentation
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Reconsidering the stylized facts of capital
flows
Advanced economy regulation and
supervision and global reforms
The impact of advanced economy
monetary policy on capital flows
Capital flow management measures
Conclusions and extension of the
proposed framework
Capital flow management measures:
background
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CFMs are administrative, tax, and prudential
measures designed to influence capital flows
Two flavors:
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“Capital controls”—discriminate on the basis of residency
“Other measures”—do not discriminate on the basis of
residency e.g. some macroprudential measures
Renewed popularity has led to new cycle of work
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CFMs can effectively manage inflows in a policy package
Can have adverse effects domestically
Unilateral impact seems to be limited
Figure 4. Capital Flows Management Measures and Related Measures
6
Number of events
by month
5
4
3
2
1
Sep-11
Aug-11
Jul-11
Jun-11
Apr-11
May-11
Mar-11
Jan-11
Feb-11
Dec-10
Oct-10
Nov-10
Sep-10
Aug-10
Jul-10
Jun-10
May-10
Apr-10
Mar-10
Feb-10
Jan-10
Dec-09
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
0
1/ The table includes CFMs and related measures used by a sample of countries to cope with capital inflows since
2009Q4 based on an updated version of Table 4 of SM/11/30. A measure or set of measures taken by a country in a
particular month is counted as one event.
Source: IMF Country Desks
Capital flow management measures:
multilateral aspects
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Focus here on CFMs aimed to address inflows
CFM can be expected to reduce asset prices and inflows
in the home country
CFMs could transmit multilaterally via capital flows to
likewise countries with similar characteristics:
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Divert flows and increase asset prices and inflows in likewise
Reduce flows and decrease asset prices and inflows in likewise
Event studies suggested CFMs can increase or decrease
flows to likewise countries
Capital flow management measures:
implications
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As of today, CFMs seem to have limited
implications for the riskiness of flows
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Modest unilateral effectiveness
Inconclusive multilateral transmission
Market participants view them as ineffective
Downside risk of CFM proliferation
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Adverse dynamic (trade wars)
Closure of capital accounts limits benefits of
capital flows
Organization of presentation
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

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Reconsidering the stylized facts of capital
flows
Advanced economy regulation and
supervision and global reforms
The impact of advanced economy
monetary policy on capital flows
Capital flow management measures
Conclusions and extension of the
proposed framework
Extension of policy framework
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Bottom line: national authorities should pay more
attention to policy transmission, especially prudential
Fund previously proposed framework to address
domestic aspects of CFMs for recipient countries
This paper proposed extending framework to help:
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policymakers understand how risks transmit across borders
promote policy coordination
Extension of policy framework
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National supervisors should understand risk cross-border
transmission and be prepared to take countervailing
measures
National supervisors should have the appropriate
capacity and perimeter
Macroprudential policy should account for capital flows,
and coordinate across countries
Complete and fully implement the ongoing international
architecture reforms
Reaction to paper
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Broad agreement by Directors on the conclusions of the
paper
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Discussion of AE monetary policy
Discussion of applicability of extension of the framework
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Extensive press coverage
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Next steps
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Paper on capital account liberalization
Chapeau paper
Questions