## ARE COUNTRIES LOSING CONTROL OF DOMESTIC FINANCIAL CONDITIONS?

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**Canonical URL:** [ARE COUNTRIES LOSING CONTROL OF DOMESTIC FINANCIAL CONDITIONS?](https://www.imf.org/-/media/files/publications/gfsr/2017/april/ch03-summary-4thproofs-040417.pdf)

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### Key findings
- A common component (global financial conditions) accounts for about 20 to 40 percent of the variation in countries’ domestic financial conditions indices (FCIs).
- There is notable heterogeneity across countries in the share of FCI variation explained by global financial conditions.
- The importance of global financial conditions does not seem to have increased markedly over the past two decades.
- On average, countries still appear to hold sway over their own financial conditions—specifically, through monetary policy.
- The rapid speed at which foreign shocks affect domestic financial conditions may make it difficult to react in a timely and effective manner, if deemed necessary.
- Global financial conditions tend to account for a greater fraction of FCI variability in emerging market economies than in advanced economies.

### Analysis and interpretation
- Greater financial integration complicates domestic management of financial conditions by:
  - Requiring policymakers to take external factors into greater consideration when pursuing domestic objectives.
  - Potentially hampering the transmission of monetary policy and the control of domestic financial conditions.
- Measuring financial conditions via FCIs across a large set of advanced and emerging market economies allows comparison of the evolving importance of common global components.

### Policy recommendations
- Emerging market economies, in particular, should prepare for the implications of global financial tightening given their higher exposure to global components of FCIs.
- Governments can promote domestic financial deepening to enhance resilience to global financial shocks, including:
  - Developing a local investor base.
  - Fostering greater equity-market depth and liquidity.
  - Fostering greater bond-market depth and liquidity.

*Source: ch03-summary-4thproofs-040417*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2017/april/ch03-summary-4thproofs-040417.pdf_