CAPITAL FLOWS AND MACROPRUDENTIAL REGULATION
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Transcript of CAPITAL FLOWS AND MACROPRUDENTIAL REGULATION
CAPITAL FLOWS AND CAPITAL FLOWS AND MACROPRUDENTIAL MACROPRUDENTIAL
REGULATIONREGULATION
José Antonio OcampoColumbia University
CHARACTERISTICSCHARACTERISTICSOF CAPITAL FLOWSOF 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 Bank and portfolio flows are highly sensitive to interest/risk mixsensitive to interest/risk mix
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
Low interest, low risk
Low interest, high risk
High interest, low risk
High interest, high risk
Bank and other
Net portfolio debt
Net portfolio equity
Net FDI
Debt portfolio flows are the distinctive Debt portfolio flows are the distinctive feature of the recent surge in Latin Americafeature of the recent surge in Latin America
Emerging Asia
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1991–97 2004–07 2010 Q1-Q3
FDI Portfolio equity Portfolio debt Bank and others
Emerging Latin America
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1991–97 2004–07 2010 Q1-Q3
FDI Portfolio equity Portfolio debt Bank and other
Volatility has increased, particularly for FDI. Volatility has increased, particularly for FDI. Persistence is low and has declined.Persistence is low and has declined.
Volatility
0
0.5
1
1.5
2
2.5
3
3.5
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
FDI Portfolio equity Portfolio debt Bank and other
Persistence
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
FDI Portfolio equity Portfolio debt Bank and other
Some additional featuresSome 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
Riskier markets are pro-cyclical, Riskier markets are pro-cyclical, but segmentation has declinedbut segmentation has declined
Emerging Markets' Spreads and Yields, 1998-2010
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
1-Jan-98
1-Jul-9
8
1-Jan-99
1-Jul-9
9
1-Jan-00
1-Jul-0
0
1-Jan-01
1-Jul-0
1
1-Jan-02
1-Jul-0
2
1-Jan-03
1-Jul-0
3
1-Jan-04
1-Jul-0
4
1-Jan-05
1-Jul-0
5
1-Jan-06
1-Jul-0
6
1-Jan-07
1-Jul-0
7
1-Jan-08
1-Jul-0
8
1-Jan-09
1-Jul-0
9
1-Jan-10
1-Jul-1
0
Spreads Yields
Due to massive reserve accumulation …
Foreign exchange reserves (% of GDP)
0%
5%
10%
15%
20%
25%
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%High income, excluding JapanJapanMiddle-income, excluding ChinaLow-incomeChina
… … and domestic market development in EMEsand domestic market development in EMEs
Capital markets in EMEs are small Capital markets in EMEs are small compared to AEscompared to AEs
Domestic debt securities (Sept. 2010)
37.9%
48.5%
13.6%USA
Other advanced
EMEs
Domestic + International
33.9%
55.0%
11.1%USA
Other advanced
EMEs
The current surge: explanationsThe current surge: explanationsand paradoxesand 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 capitalDomestic financial market development has the same
effect
Monetary base expansion in the US has led to Monetary base expansion in the US has led to increasing reserves deposited in the Fedincreasing reserves deposited in the Fed
US Monetary base and non-borrowed reserves (billion dollars)
-500
0
500
1,000
1,500
2,000
2,500
3,000
Jan-
04
May
-04
Sep
-04
Jan-
05
May
-05
Sep
-05
Jan-
06
May
-06
Sep
-06
Jan-
07
May
-07
Sep
-07
Jan-
08
May
-08
Sep
-08
Jan-
09
May
-09
Sep
-09
Jan-
10
May
-10
Sep
-10
Jan-
11
Monetary base Non-borrowed reserves
The two speed world economy, The two speed world economy, which has its mirror in monetary policieswhich has its mirror in monetary policies
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
1970
1975
1980
1985
1990
1995
2000
2005
2010
Developed Developing 1971-2002 2003-2012
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 DEBATETHE POLICY DEBATE
The central policy issues (1)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 counter-
cyclical 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 cycleFinancial flows to LA (% of GDP)
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Inflows Net
The central policy issues (2)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% 3.0% 6.0% 9.0% 12.0% 15.0% 18.0% 21.0%
ArgentinaBrazilChile
ColombiaGuatemala
MexicoPeru
Uruguay
BoliviaCosta RicaDom. Rep.HondurasNicaraguaParaguay
Venezuela
EcuadorEl Salvador
Panama
Exchange rate regimes: recent Latin American experience (2)
Real appreciation: May 2011 vs. average 2004-11-10.00 -5.00 0.00 5.00 10.00 15.00 20.00 25.00 30.00
ArgentinaBrazilChile
ColombiaGuatemala
MexicoPeru
Uruguay
BoliviaCosta RicaDom. Rep.HondurasNicaraguaParaguay
Venezuela
EcuadorEl Salvador
Panama
The central policy issues (3)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 measuresCapital-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 CAPITAL FLOWS AND MACROPRUDENTIAL MACROPRUDENTIAL
REGULATIONREGULATION
José Antonio OcampoColumbia University