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Macroprudential Policy Interlinkages

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Abstract

Emerging markets are concerned about sudden stops in international capital flows, which may lead to severe recessions associated with vicious spirals of currency depreciations and tightening borrowing constraints. A common prescription is to impose macroprudential policies, including prudential capital controls, to limit international borrowing especially in foreign currency. This paper analyzes the supportive role of macroprudential policies geared toward the domestic financial market, suggesting that emerging markets should resort to a wide mix of policies, even when the domestic financial market is frictionless. A simple formula provides further insights: domestic and international macroprudential policies are imperfect complements rather than substitutes, due to distinctive characteristics of foreign and domestic currency bonds. Furthermore, the relative importance of domestic macroprudential regulation increases in the return of domestic bonds.

Suggested Citation

  • Johannes Matschke, 2021. "Macroprudential Policy Interlinkages," Research Working Paper RWP 21-10, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:93107
    DOI: 10.18651/RWP2021-10
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    More about this item

    Keywords

    Macroprudential Policies; Capital Controls; Emerging Markets; Welfare;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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