Reflections on Macroprudential Policy
IMF News, January 23, 2014
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- Authors: Naoyuki Shinohara
- Published: January 23, 2014
Global Outlook
- Speech delivered by Naoyuki Shinohara, Deputy Managing Director, International Monetary Fund, Tokyo, January 23, 2014; marked as "As Prepared for Delivery".
- Context: "Last September marked the five-year mark from the collapse of Lehman Brothers" which "triggered the worst financial crisis the world has seen in decades."
- IMF assessment: "The latest update to the Fund’s World Economic Outlook, released just two days ago, shows that global activity strengthened in the second half of 2013."
- Projections and assessments:
- Global activity "is expected to improve further in 2014-15, driven largely by recovery in the advanced economies."
- "But global growth remains below potential—the level consistent with economic health and full employment."
- Labor markets in advanced economies are weak and unemployment "remains unacceptably high."
- Slack in advanced countries raises the risk that inflation will run below levels consistent with price stability; "The specter of deflation, of course, is very dangerous—something Japan understands well."
- Emerging markets: "are cooling off somewhat" and face risks from "the unwinding of domestic imbalances, such as credit booms and weakened fiscal and external positions."
- Low-income countries: need to "become more resilient to shocks by building sufficient buffers and raising more revenue."
Asia’s Prospects
- Regional growth estimates:
- "The IMF estimates that Asian growth hit about 5 percent in 2013, and will rise to about 5¼ percent in 2014."
- Drivers and risks:
- Domestic demand has driven growth but has "been more subdued lately" due to tighter financial conditions and, in some cases, policy or political uncertainty.
- Financial conditions "remain generally supportive even after the recent tightening, and labor markets have been resilient."
- Asian exports "picked up in recent months" but future growth is contingent on sustained recovery in advanced economies.
- Inflation expected to remain low, with exceptions: "India and, to a lesser extent, Indonesia."
- Region experienced "re-pricing of financial assets and the wave of capital outflows from emerging markets in spring-summer last year" with overall impact so far manageable but country-specific stress.
- Country-specific notes:
- Japan: "growth will remain above trend as the contractionary effects of the consumption tax hike are offset by the latest fiscal stimulus."
- China: "growth rebounded in the second half of 2013 and should remain robust this year. It likely will moderate marginally as measures to cool credit expansion dampen investment."
- India: "growth is expected to firm on policies supporting investment and a favorable monsoon, but it will remain below trend."
- ASEAN (including Malaysia and the Philippines): "registered healthy growth in 2013" with sound prospects for 2014; "Indonesia is projected to slow largely as a result of recent monetary tightening."
- Policy implications:
- Tighter global liquidity and homegrown structural impediments will weigh on growth, partly offset by pickup in exports and domestic demand.
- Greater differentiation across the region if conditions tighten further:
- Countries with strong fundamentals and credible policies can offset tighter global credit with lower policy rates and fiscal support.
- Countries that have delayed reforms or tolerate high inflation "may be forced to respond with pro-cyclical tightening."
- Announcing credible medium-term reforms would "rebuild confidence and ease policy trade-offs."
- Commentary on local currency promotion: use of local currencies in Cambodia, Lao PDR, Myanmar and Vietnam is "important, but under-researched" and influenced by history, confidence effects, and credible and independent central banks.
Macroprudential Policy in Asia
- Rationale:
- The financial crisis highlighted "the costs of systemic instability" and the need for "dedicated macroprudential policies to safeguard financial stability."
- Asia, as a key destination for capital flows, faces challenges that have direct implications for macroprudential policies.
- Key concerns:
- "Implications of financial liberalization in China will be significant and difficult to predict."
- "Increased volatility of cross-border capital flows will continue to preoccupy policymakers."
- Need for deeper financial markets and further development of macroprudential policies to reduce vulnerabilities and enhance resilience.
- Regional experience:
- Macroprudential approach "is not new to Asia"—post-Asian Crisis reforms improved regulation and supervision.
- Asia’s bank-dominated systems "have come through the global financial crisis generally unscathed."
- ASEAN+3 countries have "deployed targeted and escalating macroprudential policies" to address housing and other asset market vulnerabilities amid low global interest rates and surging capital flows.
- Measures targeted mortgage loans, car loans, or credit card loans deemed at risk and "have helped address vulnerabilities."
- Limits:
- Macroprudential policies "cannot be expected to prevent all future crises" and are "unlikely to contain risks driven by real imbalances" on their own.
- Must be supported by strong supervision and enforcement and complemented by monetary, fiscal, and other policies.
- Authorities should consider unintended consequences such as impacts on trade finance and financial deepening.
Enhancing the Effectiveness of Policy Tools
- Key steps to improve macroprudential effectiveness (as identified in the speech):
- Developing the capacity to assess systemic risk;
- Assembling and calibrating the macroprudential toolkit;
- Communicating clearly with the public and markets;
- Monitoring and closing regulatory and data gaps; and
- Setting up appropriate institutional frameworks.
- Specific deficiencies in the Asian context:
- Closing existing data gaps;
- Assessing systemic risks;
- Enhancing regional and international cooperation.
- Data and analysis needs:
- "Assuring access to the appropriate data and information is critical" for operational macroprudential policy.
- Need for closer analysis of vulnerability build-up in the context of financial sector interconnectedness.
- Further progress required in establishing early warning systems and developing technical capacity to analyze systemic risk.
- Cross-border and coordination issues:
- Regional and international cooperation is important as Asia integrates with the global system.
- Nationally optimal macroprudential policies "may be suboptimal when financial cycles are not synchronized across countries, or systemic intermediaries can evade policy actions taken by national authorities."
- Role of macroeconomic policy:
- Appropriate macroeconomic policy can reduce burdens on macroprudential tools and improve understanding and monitoring of transmission mechanisms.
Addressing Spillover Effects
- Consideration: "how macroprudential policy could help address potential spillover effects from exiting unconventional monetary policies."
- Possibility: same tools that offset capital inflow risks may help limit adverse consequences of a reversal of inflows.
- Development: "Developing macroprudential policy will remain a work in progress."
Conclusion
- Trade-offs: "macroprudential policy, like any public policy, is not free of costs" and involves trade-offs between stability and efficiency.
- Example: higher capital and liquidity requirements can enhance systemic stability but may "make credit more expensive and lower economic growth."
- Policy judgment: balancing benefits and costs "require difficult judgments."
- Institutional collaboration: importance of increasing collaboration between the IMF and AMRO to serve Asia more effectively; the speaker expresses support for ongoing cooperation and technical assistance.
- Closing: speaker expresses hope that the seminar contributes to better understanding and that the IMF "is ready to help advise on the development and implementation of effective macroprudential policies in Asia."
Source: "Reflections on Macroprudential Policy" By Naoyuki Shinohara, Deputy Managing Director, International Monetary Fund, January 23, 2014.