## _073014e — RISKS AND SPILLOVERS (Excerpt)

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---

### EXECUTIVE SUMMARY
- Major themes and key messages
  - Importance of stocks as well as flows in assessing vulnerabilities.
  - ‘Boomerang’ effects: outward spillovers from a country’s policies or problems can swing back to hit itself.
  - Limits of relying almost entirely on models: models provide discipline and aid explanation but cannot be a crutch.
  - Opportunity from the macro‑prudential turn in national regimes to reset the scope of IMF analysis and recommendations.
  - Need for the Fund to be joined‑up, one organization, integrating bilateral and multilateral surveillance.
- Context and motivation
  - The global financial crisis and subsequent economic downturn exposed serious fault lines in the international monetary and financial system and highlighted failings in surveillance of risks to stability.
  - This Triennial Surveillance Review, the second since the height of the crisis in 2009, seeks to capture lessons from the past three years and seize opportunities provided by regulatory reforms already in train.
  - The Fund has been upgrading its surveillance efforts over recent years and emphasizes that recommendations for action in member countries are central, given the Fund’s role as a policy institution.
- Analytical priorities emphasized
  - Institutionalize focus on national balance sheets to assess vulnerabilities from liquidity, currency and other risk mismatches in liabilities and assets.
  - “Grasping the importance of gross capital flows without undertaking balance sheet analysis is like failing to finish a thought.”
  - Complement formal models with informal analysis; incorporate default risk and banking‑sector vulnerabilities that mainstream macro models historically neglected.
  - Recognize that many remedies will be macro‑prudential; regulatory policy cannot be purely micro, focusing on individual firms in isolation.
  - Bilateral and multilateral surveillance and recommendations must be joined‑up to avoid myopia in focusing only on inward spillovers.
- Recommendations overview
  - Recommendations are organized under four headings: strategy, substance, research and data development, and communications.
  - These recommendations are not offered on a pick & mix basis and are not summarized in this executive summary.

### HIGH LEVEL PRINCIPLES
- Guiding principles for IMF work on spillovers and risks to economic stability
  - It should be absolutely central to the Fund’s work.
  - It is recommendations for action in its member countries that matter, as the Fund is a policy institution.
  - Bilateral surveillance and multilateral surveillance need to be joined up if assessments are to gain traction.
- Observations on past efforts and remaining gaps
  - The IMF has increased effort on spillovers and produced dedicated Spillover Reports, but effects on policymaking and market pricing have been limited to date.
  - The global financial crisis made spillovers a first‑order issue; the Fund must avoid treating countries atomistically or separating macroeconomic outlook from the global financial system.
- Lessons on inter‑linkages across the world economy (selected)
  - Macroeconomic outturns and vulnerabilities are highly sensitive to credit‑market and banking‑system conditions.
  - The cross‑border carry trade exists, is potent, and can transmit monetary policy across borders beyond standard Mundell‑Fleming effects.
  - Gross capital flows matter, not only net capital flows.
  - National balance sheets matter because the composition of gross flows can generate liquidity or currency mismatches or excessive default‑risk transformation.
  - Flows of risk are not always coterminous with flows of funds (due to derivatives and insurance), so national‑balance‑sheet analysis must be rich.
  - Outward spillovers can boomerang back because of cross‑border financial‑risk exposures or macroeconomic linkages.
- Historical and cross‑region examples illustrating connectivity and spillovers
  - Late‑1990s Asian crises: differing external vulnerabilities across Korea, Thailand, Indonesia; external crises exceeded fiscal capacity to rescue.
  - Japan’s prolonged crisis underscores potency of excessive indebtedness and importance of banking and shadow‑banking stability.
  - 30 years ago: U.S. anti‑inflationary policy contributed to near‑collapse of western banking via dollar‑denominated sovereign defaults; highlighted importance of monitoring domestic banks’ exposures to vulnerable sovereign borrowers.
  - Wall Street crisis and euro area crisis affected Asian and Latin American economies despite modest direct exposures.
  - UK regulatory failures from mid‑2007 undermined confidence globally given London’s role as an international financial centre.
  - Euro area banks’ dependence on dollar funding from U.S.‑domiciled money market mutual funds revealed ‘hot money’ and liquidity fragilities from late 2008.
  - U.S. concern in mid‑2010 that euro area fault lines might trigger a crisis larger than late‑2008.
  - Criticism of U.S. authorities in 2013 for not grasping how muddled U.S. monetary stimulus exit could spillover to EMEs and boomerang back.
  - Widespread unease about excesses in the Chinese shadow banking system and potential spillovers beyond China.
- Failures of prior analysis and missed opportunities
  - National balance sheet analysis examining vulnerabilities in all sectors could have made a difference in preventing the global financial crisis and could have been attempted with available data.
  - Greater attentiveness to finance theory (e.g., forward‑premium puzzle, role of shifts in risk premia) could have better highlighted drivers of asset‑price fluctuations.
  - Evidence has accumulated that conventional monetary policy affects term premia (citations provided in the source).
  - Search‑for‑yield behavior and cross‑border carry trades leveraged balance sheets, raised recipient‑country asset prices, loosened credit conditions, and increased internal and external vulnerabilities.
  - Persistent global current account balances were recognized but macroeconomic analysis needed to be combined with finance puzzles, financial‑system surveillance, and balance‑sheet assessments.
  - Common international regulatory standards help create a level playing field but can leave the global system exposed if widely flawed.

### NEW POLICY REGIMES AND INSTRUMENTS: MACRO‑PRUDENTIAL
- Emergence and purpose
  - A new policy world is emerging where monetary stability and financial stability are recognized as inextricably linked.
  - Policymakers are developing macro‑prudential regimes that treat the financial system as a system and allow state‑contingent variation in regulatory parameters.
- Role and scope for the Fund
  - The Fund should focus on macro‑prudential policy as a means of guarding against major threats to stability (tail risks), not as an instrument to manage the credit cycle ambitiously.
  - Macro‑prudential policy should prioritize building system resilience to absorb prospective busts rather than fine‑tuning the credit cycle.
- Implications for Fund surveillance and policy advice
  - Macro‑prudential policy creates a new domain for the Fund to give policy advice in bilateral and multilateral surveillance; steps have been taken but embedding is incomplete.
  - Macro‑prudential focus provides a means for the Fund to prioritize big, low‑probability high‑impact risks rather than being dominated by fine‑tuning around a central outlook.
  - The Fund should persist in surveillance and publication when convinced of risks, but revise analysis if risks recede or prior judgments prove mistaken.
  - Structural fault lines in national financial systems or external balance sheets are likely to be more persistent than conjunctural imbalances.

### Spillovers and the dual nature of macro‑prudential policy (Paragraph 19)
- Spillover dynamics and risks
  - Macro‑prudential policy, while often aimed at containing externally generated threats, can itself create positive or negative cross‑border spillovers.
  - Risk: the “macro‑prudential” label may be used to justify capital controls that aim to improve or resist a warranted change in an economy’s terms of trade — described as beggar‑thy‑neighbor intervention.
  - Counterpoint: orthodox macro‑prudential measures designed to mitigate national‑balance‑sheet vulnerabilities can spare neighbors adverse spillovers from financial crisis.
  - Capital‑flow measures (CFMs) are instruments without a unique objective: they can be macro‑prudential (to build resilience against ‘hot’ inflows), legitimate last‑resort macroeconomic measures (as described by the Fund), or abused. (Footnote number: 6)
  - Procedural and substantive safeguards should be found to separate legitimate from abusive uses of the “macro‑prudential” label. Example safeguard: require public explanation of which sectors’ balance sheets would have been materially impaired absent the measures and why that posed instability risk.

### Models, uncertainty, and the limits of comprehension
- Key observations
  - Global and national stability policies must account for threats from the international environment; weaknesses in Western banking supervision were amplified (not caused) by global current account imbalances via effects on world real interest rates and asset values.
  - Latent vulnerabilities in EME financial systems are not caused by advanced‑economy monetary policies, but are more toxic in the presence of ‘hot’ capital inflows.
  - There is insufficient knowledge to fully capture these dynamics in structural or forecasting models.
  - Tension: analytical rigor from models disciplines surveillance and advice, but overreliance on formal models risks sapping credibility with national policymakers and ignores frontier limitations of knowledge.
  - Ways must be found to incorporate disciplined intelligence, anecdotes, and pathologies into Fund outputs; failure to do so contributed to the global financial crisis.
- Guidance on model use and forecasts
  - It is important to tell stories about forecasts and explain them; black‑box forecasts are of limited value in dialogue with members.
  - Probabilistic forecasts are generally more useful than point forecasts of the central outlook.
  - Use a range of models for robustness and exercise judgment in drawing conclusions.
  - The Fund is integrating asset‑price puzzles into modelling via simulations calibrated from event studies and other empirical methods, and should experiment further with purely data‑driven models.

### Recommendations for action — Overview
- Recommendations are organized under: strategy, substance, research and data development, and communications.
- The package is intended as a coherent set of practical actions, not a pick‑and‑mix menu.

#### A. Strategy — key recommendations (Paragraphs: 25, 26, 27, 28, 29)
- Retain the Spillover Report as a disciplining device focused on risks and spillovers; internal debate on reducing Fund “products” should not result in dropping the Spillover Report. (Paragraphs: 25, 26)
- Cascade recommendations for national action in Article IV and FSAP reports from multilateral surveillance outputs (WEO, GFSR, and Spillover Reports) so multilateral analysis affects national policy. (Paragraph: 27)
- Routinely make recommendations on macro‑prudential policy, placing it centre stage alongside fiscal, monetary and structural surveillance. (Paragraph: 28)
- Ensure bilateral surveillance covers outward spillover risks as well as inward spillovers; give greater priority and prominence to boomerang or spillback risks. (Paragraphs: 29)

#### B. Substance — key recommendations (Paragraphs: 30–35)
- Make national‑balance‑sheet (NBS) analysis a priority; no Article IV or FSAP report should be approved without such analysis. Note: the Integrated Surveillance Decision (ISD) embedded outward spillovers but did not mention NBS analysis — characterized in the text as a mistake. (Paragraph: 30)
- Use available data and published reports to synthesize incomplete data and softer anecdotal information to press national authorities for answers; do not let the best be enemy of the good. (Paragraph: 30)
- Distinguish outward spillovers likely to “boomerang” back from those whose costs fall only on the rest of the world; the rapid growth of EMEs makes this more pressing. (Paragraph: 31)
- Promulgate criteria for evaluating adequacy of member countries’ macro‑prudential regimes and institutions; current practice varies enormously and some jurisdictions may lack capability to act decisively, particularly outside de jure banks. (Paragraph: 32)
- Develop criteria to discriminate macro‑prudential policies that build resilience and are benign for neighbors from policies intended to protect terms of trade or forestall warranted macroeconomic adjustment. (Paragraph: 33)
- In analysis and recommendations, try to distinguish between:
  - (a) purely macroeconomic spillover channels (without major shifts in risk premia or gross financial flows),
  - (b) purely financial system‑vulnerability spillover channels,
  - and those involving both, recognizing different policy instruments map to these channels. (Paragraph: 34)
- Distinguish tail risks from central‑tendency risks using a probabilistic framework; ascribe subjective probabilities to scenarios and apply impact‑weighting for tail risks. Emphasize where probability of serious disruption is creeping up. Avoid a shopping‑list approach but do not withhold longer lists when warranted. (Paragraph: 35)

#### C. Research and data development — key recommendations (Paragraphs: 36–42)
- Prioritize research on:
  - The risk channels of monetary policy and role of risk premia in macroeconomic fluctuations. (Paragraph: 36)
  - Cross‑border capital flows and whether some types are systematically flighty or ‘hot’; read across to domestic macro‑prudential policy. Example: unlevered investment funds and U.S. money market funds as potentially flighty sources of funding. (Paragraph: 37)
  - The extent to which cross‑border flows of risk, via derivatives and other insurance, can threaten stability without an associated flow of funds; coordinate with the Bank for International Settlements as needed. (Paragraph: 38)
  - Conditions under which properly directed macro‑prudential policy has positive effects for neighbors (by reducing crisis likelihood) and conditions where it could have negative spillovers; aim to articulate criteria for identifying misuse of the “macro‑prudential” label to camouflage capital controls. (Paragraph: 39)
  - Boomerang processes and effects, using case studies and distinguishing shorter‑run and longer‑run channels and effects. (Paragraph: 40)
- Document apparent properties of the financial and economic world not captured in mainstream structural models or where econometric evidence is ambiguous; incorporate informal knowledge into surveillance and recommendations to avoid epistemological bias. (Paragraph: 41)
- Ensure all significant countries have rich flow‑of‑funds data and develop timetabled programmes to improve balance‑sheet data; variability in flow‑of‑funds data across countries is striking and the Fund should help countries catch up with the USA as a stepping stone. Strengthen collection of financial data of non‑financial corporations and coordinate with the G20 data gap initiatives. In the interim, pull together data from private and public sources. (Paragraph: 42)

#### D. Communications — key recommendations (Paragraphs: 43–44)
- Top Fund officials should use speeches and interviews to give prominence to the Fund’s work on spillovers, including the Spillover Reports, to achieve powerful signaling effects. (Paragraph: 43)
- Be more willing to cover in published Spillover Reports tail events already widely discussed in markets and commentary; current public treatment rarely engages tail events even when publicly debated. Greater transparency, including stressing probabilities, could be a disciplining and accountability device.
- Where advanced economies source first‑round spillovers, Fund analysis can better identify potential boomerang effects. Reports that do not engage with the biggest risks are unlikely to gain traction. (Paragraph: 44)

*Source: Excerpt from the IMF document _073014e (2014) — “RISKS AND SPILLOVERS”*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Major themes and key messages
- Importance of stocks as well as flows in assessing vulnerabilities.
- ‘Boomerang’ effects: outward spillovers from a country’s policies or problems can swing back to hit itself.
- Limits of relying almost entirely on models: models provide discipline and aid explanation but cannot be a crutch.
- Opportunity from the macro-prudential turn in national regimes to reset the scope of IMF analysis and recommendations.
- Need for the Fund to be joined-up, one organization, integrating bilateral and multilateral surveillance.

### Context and motivation
- The global financial crisis and subsequent economic downturn exposed serious fault lines in the international monetary and financial system and highlighted failings in surveillance of risks to stability.
- This Triennial Surveillance Review, the second since the height of the crisis in 2009, seeks to capture lessons from the past three years and seize opportunities provided by regulatory reforms already in train.
- The Fund has been upgrading its surveillance efforts over recent years and emphasizes that recommendations for action in member countries are central, given the Fund’s role as a policy institution.

### Analytical priorities emphasized
- Institutionalize focus on national balance sheets to assess vulnerabilities from liquidity, currency and other risk mismatches in liabilities and assets.
- Grasp the importance of gross capital flows without undertaking balance sheet analysis is incomplete: “Grasping the importance of gross capital flows without undertaking balance sheet analysis is like failing to finish a thought.”
- Complement formal models with informal analysis; incorporate default risk and banking-sector vulnerabilities that mainstream macro models historically neglected.
- Recognize that many remedies will be macro-prudential; regulatory policy cannot be purely micro, focusing on individual firms in isolation.
- Bilateral and multilateral surveillance and recommendations must be joined-up to avoid myopia in focusing only on inward spillovers.

### Recommendations overview
- Recommendations are organized under four headings: strategy, substance, research and data development, and communications.
- These recommendations are not offered on a pick & mix basis and are not summarized in this executive summary.

*Source: EXECUTIVE SUMMARY, July 30, 2014.*

---

### HIGH LEVEL PRINCIPLES

### Guiding principles for IMF work on spillovers and risks to economic stability
- It should be absolutely central to the Fund’s work.
- It is recommendations for action in its member countries that matter, as the Fund is a policy institution.
- Bilateral surveillance and multilateral surveillance need to be joined up if assessments are to gain traction.

### Observations on past efforts and remaining gaps
- The IMF has increased effort on spillovers and produced dedicated Spillover Reports, but effects on policymaking and market pricing have been limited to date.
- The global financial crisis made spillovers a first-order issue; the Fund must avoid treating countries atomistically or separating macroeconomic outlook from the global financial system.

### Lessons on inter-linkages across the world economy (selected)
- Macroeconomic outturns and vulnerabilities are highly sensitive to credit-market and banking-system conditions.
- The cross-border carry trade exists, is potent, and can transmit monetary policy across borders beyond standard Mundell-Fleming effects.
- Gross capital flows matter, not only net capital flows.
- National balance sheets matter because the composition of gross flows can generate liquidity or currency mismatches or excessive default-risk transformation.
- Flows of risk are not always coterminous with flows of funds (due to derivatives and insurance), so national-balance-sheet analysis must be rich.
- Outward spillovers can boomerang back because of cross-border financial-risk exposures or macroeconomic linkages.

### Historical and cross-region examples illustrating connectivity and spillovers
- Late-1990s Asian crises: differing external vulnerabilities across Korea, Thailand, Indonesia; external crises exceeded fiscal capacity to rescue.
- Japan’s prolonged crisis underscores potency of excessive indebtedness and importance of banking and shadow-banking stability.
- 30 years ago: U.S. anti-inflationary policy contributed to near-collapse of western banking via dollar-denominated sovereign defaults; highlighted importance of monitoring domestic banks’ exposures to vulnerable sovereign borrowers.
- Wall Street crisis and euro area crisis affected Asian and Latin American economies despite modest direct exposures.
- UK regulatory failures from mid-2007 undermined confidence globally given London’s role as an international financial centre.
- Euro area banks’ dependence on dollar funding from U.S.-domiciled money market mutual funds revealed ‘hot money’ and liquidity fragilities from late 2008.
- U.S. concern in mid-2010 that euro area fault lines might trigger a crisis larger than late-2008.
- Criticism of U.S. authorities in 2013 for not grasping how muddled U.S. monetary stimulus exit could spillover to EMEs and boomerang back.
- Widespread unease about excesses in the Chinese shadow banking system and potential spillovers beyond China.

### Failures of prior analysis and missed opportunities
- National balance sheet analysis examining vulnerabilities in all sectors could have made a difference in preventing the global financial crisis and could have been attempted with available data.
- Greater attentiveness to finance theory (e.g., forward-premium puzzle, role of shifts in risk premia) could have better highlighted drivers of asset-price fluctuations.
- Evidence has accumulated that conventional monetary policy affects term premia (citations provided in the source).
- Search-for-yield behavior and cross-border carry trades leveraged balance sheets, raised recipient-country asset prices, loosened credit conditions, and increased internal and external vulnerabilities.
- Persistent global current account balances were recognized but macroeconomic analysis needed to be combined with finance puzzles, financial-system surveillance, and balance-sheet assessments.
- Common international regulatory standards help create a level playing field but can leave the global system exposed if widely flawed.

---

### NEW POLICY REGIMES AND INSTRUMENTS: MACRO-PRUDENTIAL

### Emergence and purpose
- A new policy world is emerging where monetary stability and financial stability are recognized as inextricably linked.
- Policymakers are developing macro-prudential regimes that treat the financial system as a system and allow state-contingent variation in regulatory parameters.

### Role and scope for the Fund
- The Fund should focus on macro-prudential policy as a means of guarding against major threats to stability (tail risks), not as an instrument to manage the credit cycle ambitiously.
- Macro-prudential policy should prioritize building system resilience to absorb prospective busts rather than fine-tuning the credit cycle.

### Implications for Fund surveillance and policy advice
- Macro-prudential policy creates a new domain for the Fund to give policy advice in bilateral and multilateral surveillance; steps have been taken but embedding is incomplete.
- Macro-prudential focus provides a means for the Fund to prioritize big, low-probability high-impact risks rather than being dominated by fine-tuning around a central outlook.
- The Fund should persist in surveillance and publication when convinced of risks, but revise analysis if risks recede or prior judgments prove mistaken.
- Structural fault lines in national financial systems or external balance sheets are likely to be more persistent than conjunctural imbalances.

*Source: EXECUTIVE SUMMARY, July 30, 2014.*

### 19.      Third, while much macro-prudential policy will be directed at containing risks from

### _073014e - 19.      Third, while much macro-prudential policy will be directed at containing risks from

### Spillovers and the dual nature of macro‑prudential policy
- Macro-prudential policy, while often aimed at containing externally generated threats, can itself create positive or negative cross‑border spillovers.
- Risk: the “macro-prudential” label may be used to justify capital controls that aim to improve or resist a warranted change in an economy’s terms of trade — described as beggar‑thy‑neighbor intervention.
- Counterpoint: orthodox macro‑prudential measures designed to mitigate national‑balance‑sheet vulnerabilities can spare neighbors adverse spillovers from financial crisis.
- Capital‑flow measures (CFMs) are instruments without a unique objective: they can be macro‑prudential (to build resilience against ‘hot’ inflows), legitimate last‑resort macroeconomic measures (as described by the Fund), or abused. (Footnote number: 6)
- Procedural and substantive safeguards should be found to separate legitimate from abusive uses of the “macro‑prudential” label. Example safeguard: require public explanation of which sectors’ balance sheets would have been materially impaired absent the measures and why that posed instability risk.

### Models, uncertainty, and the limits of comprehension
- Global and national stability policies must account for threats from the international environment; weaknesses in Western banking supervision were amplified (not caused) by global current account imbalances via effects on world real interest rates and asset values.
- Latent vulnerabilities in EME financial systems are not caused by advanced‑economy monetary policies, but are more toxic in the presence of ‘hot’ capital inflows.
- There is insufficient knowledge to fully capture these dynamics in structural or forecasting models.
- Tension: analytical rigor from models disciplines surveillance and advice, but overreliance on formal models risks sapping credibility with national policymakers and ignores frontier limitations of knowledge.
- Ways must be found to incorporate disciplined intelligence, anecdotes, and pathologies into Fund outputs; failure to do so contributed to the global financial crisis.

### Guidance on model use and forecasts
- Three points on model‑based forecasts:
  - It is important to tell stories about forecasts and explain them; black‑box forecasts are of limited value in dialogue with members.
  - Probabilistic forecasts are generally more useful than point forecasts of the central outlook.
  - Use a range of models for robustness and exercise judgment in drawing conclusions.
- The Fund is integrating asset‑price puzzles into modelling via simulations calibrated from event studies and other empirical methods, and should experiment further with purely data‑driven models.

### Recommendations for action — Overview
- Recommendations are organized under: strategy, substance, research and data development, and communications.
- The package is intended as a coherent set of practical actions, not a pick‑and‑mix menu.

### A. Strategy — key recommendations
- Retain the Spillover Report as a disciplining device focused on risks and spillovers; internal debate on reducing Fund “products” should not result in dropping the Spillover Report. (Paragraphs: 25, 26)
- Cascade recommendations for national action in Article IV and FSAP reports from multilateral surveillance outputs (WEO, GFSR, and Spillover Reports) so multilateral analysis affects national policy. (Paragraph: 27)
- Routinely make recommendations on macro‑prudential policy, placing it centre stage alongside fiscal, monetary and structural surveillance. (Paragraph: 28)
- Ensure bilateral surveillance covers outward spillover risks as well as inward spillovers; give greater priority and prominence to boomerang or spillback risks. (Paragraphs: 29)

### B. Substance — key recommendations
- Make national‑balance‑sheet (NBS) analysis a priority; no Article IV or FSAP report should be approved without such analysis. Note: the Integrated Surveillance Decision (ISD) embedded outward spillovers but did not mention NBS analysis — characterized in the text as a mistake. (Paragraph: 30)
- Use available data and published reports to synthesize incomplete data and softer anecdotal information to press national authorities for answers; do not let the best be enemy of the good. (Paragraph: 30)
- Distinguish outward spillovers likely to “boomerang” back from those whose costs fall only on the rest of the world; the rapid growth of EMEs makes this more pressing. (Paragraph: 31)
- Promulgate criteria for evaluating adequacy of member countries’ macro‑prudential regimes and institutions; current practice varies enormously and some jurisdictions may lack capability to act decisively, particularly outside de jure banks. (Paragraph: 32)
- Develop criteria to discriminate macro‑prudential policies that build resilience and are benign for neighbors from policies intended to protect terms of trade or forestall warranted macroeconomic adjustment. (Paragraph: 33)
- In analysis and recommendations, try to distinguish between:
  - (a) purely macroeconomic spillover channels (without major shifts in risk premia or gross financial flows),
  - (b) purely financial system‑vulnerability spillover channels,
  - and those involving both, recognizing different policy instruments map to these channels. (Paragraph: 34)
- Distinguish tail risks from central‑tendency risks using a probabilistic framework; ascribe subjective probabilities to scenarios and apply impact‑weighting for tail risks. Emphasize where probability of serious disruption is creeping up. Avoid a shopping‑list approach but do not withhold longer lists when warranted. (Paragraph: 35)

### C. Research and data development — key recommendations
- Prioritize research on:
  - The risk channels of monetary policy and role of risk premia in macroeconomic fluctuations. (Paragraph: 36)
  - Cross‑border capital flows and whether some types are systematically flighty or ‘hot’; read across to domestic macro‑prudential policy. Example: unlevered investment funds and U.S. money market funds as potentially flighty sources of funding. (Paragraph: 37)
  - The extent to which cross‑border flows of risk, via derivatives and other insurance, can threaten stability without an associated flow of funds; coordinate with the Bank for International Settlements as needed. (Paragraph: 38)
  - Conditions under which properly directed macro‑prudential policy has positive effects for neighbors (by reducing crisis likelihood) and conditions where it could have negative spillovers; aim to articulate criteria for identifying misuse of the “macro‑prudential” label to camouflage capital controls. (Paragraph: 39)
  - Boomerang processes and effects, using case studies and distinguishing shorter‑run and longer‑run channels and effects. (Paragraph: 40)
- Document apparent properties of the financial and economic world not captured in mainstream structural models or where econometric evidence is ambiguous; incorporate informal knowledge into surveillance and recommendations to avoid epistemological bias. (Paragraph: 41)
- Ensure all significant countries have rich flow‑of‑funds data and develop timetabled programmes to improve balance‑sheet data; variability in flow‑of‑funds data across countries is striking and the Fund should help countries catch up with the USA as a stepping stone. Strengthen collection of financial data of non‑financial corporations and coordinate with the G20 data gap initiatives. In the interim, pull together data from private and public sources. (Paragraph: 42)

### D. Communications — key recommendations
- Top Fund officials should use speeches and interviews to give prominence to the Fund’s work on spillovers, including the Spillover Reports, to achieve powerful signaling effects. (Paragraph: 43)
- Be more willing to cover in published Spillover Reports tail events already widely discussed in markets and commentary; current public treatment rarely engages tail events even when publicly debated. Greater transparency, including stressing probabilities, could be a disciplining and accountability device. Where advanced economies source first‑round spillovers, Fund analysis can better identify potential boomerang effects. Reports that do not engage with the biggest risks are unlikely to gain traction. (Paragraph: 44)

*Source: Excerpt from the IMF document _073014e (2014) — “RISKS AND SPILLOVERS”*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2014/_073014e.pdf_