IMF Board discusses role of macroprudential policies for capital flows
Published: Jul 06, 2017
By TIOLCORP News Service
NEW DELHI, JULY 06 2017: The Executive Board of the International Monetary Fund (IMF), last week, discussed a staff paper on “ Increasing Resilience to Large and Volatile Capital Flows: the Role of Macroprudential Policies.” Capital flows can bring substantial benefits for countries, but the experience is that large and volatile capital flows can also give rise to systemic financial risks. Post-crisis financial regulatory reforms have therefore focused on increasing the resilience of financial systems, and the development and mainstreaming of macroprudential policies (MPP) has been an important element of these efforts.
Executive Directors welcomed the discussion on the role of macroprudential policies in increasing resilience to large and volatile capital flows and a conceptual framework for identifying and assessing macroprudential measures (MPMs), which in some cases may also be capital flow management measures (CFMs). They appreciated the detailed country case studies, which provide a valuable insight from international experience in this policy area. Directors recognized that capital flows deliver significant benefits but also have the potential to contribute to a build-up of systemic financial risk, especially if they are large and volatile. They also reiterated that macroeconomic policies, including exchange rate flexibility, need to play a key role in managing risks associated with capital flows, and that MPMs and CFMs should not be used to substitute for warranted macroeconomic adjustment.
Directors highlighted that capital outflows should be handled primarily by macroeconomic policies. Nevertheless, where sufficient buffers are in place, a relaxation of MPMs may assist in countering financial stress from outflows. Directors emphasized the need to carefully calibrate decisions on relaxing particular MPMs, mindful of the need to preserve market confidence and the financial system's resilience to future shocks.
Directors observed that, while experience in the use of MPMs is growing, policymakers are still learning how best to calibrate them, with a view toward maximizing their benefits and minimizing costs to financial institutions, borrowers, and economic growth. Gauging the effectiveness of specific MPMs, notably in terms of the reduction in risk and severity of crises, remains challenging. Accordingly, Directors emphasized the need to progressively build up expertise and allow the macroprudential framework to evolve over time to incorporate new experience and insights.