Macroprudential policies in a global perspective

This paper analyzes the case for international coordination of domestic macroprudential policies and macroprudential capital controls in the context of a simple theoretical framework. I argue that domestic macroprudential policies are generally the first-best instrument to deal with excessive growth in domestic credit and capital inflows but that, given the narrow focus of domestic macroprudential policies on the banking sector, capital controls may have a useful role to play. Both domestic macroprudential policies and prudential capital controls generate international spillovers, and their uncoordinated use may lead to a \\"capital war\\" that depresses global interest rates. International coordination of macroprudential policies is not warranted in general but it may be if global demand is depressed. Similarly, there is scope for international policy coordination when one part of the world implememts a monetary stimulus while the rest of the world accumulates reserves for prudential reasons.