Global shocks and international policy coordination

We show as emerging markets (EMs) size crosses a threshold it is in advanced economies (AEs) own interest to reduce negative spillovers to EMs. It follows the potential for international cooperation in macroeconomic and prudential policy increases. But entrenched perceptions and historical advantages are obstacles. These blocks are explored as well as possibilities in macroeconomic policies and in prudential regulation. Export of capital is a major way AEs earn a share in EM income. AE macroeconomic policy and volatile capital outflows from AEs are a source of negative spillovers for EMs, but preventive prudential regulation is not adequate in AEs. More regulation is likely to reduce short‐term returns to capital flows but not long‐term, since with fewer crises both AE and EM income streams would rise. Moreover, there is some evidence excess capital flow volatility has adverse effects on AEs themselves. It follows universal macro‐prudential polices would benefit both country groups.