Policy Papers

<p>&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; Capital flows can deliver substantial benefits for countries, but also have
the potential to contribute to a buildup of systemic financial risk.
Benefits, such as enhanced investment and consumption smoothing, tend to be
greater for countries whose financial and institutional development enables
them to intermediate capital flows safely.<br>
<br>
Post-crisis reforms, including the development of macroprudential policies
(MPPs), are helping to strengthen the resilience of financial systems
including to shocks from capital flows. The Basel III process has improved
the quality and level of capital, reduced leverage, and increased liquid
asset holdings in financial systems. Drawing on and complementing such
international reforms at the national level, robust
macroprudential policy frameworks focused on mitigating systemic risk can
improve the capacity of a financial system to safely intermediate
cross-border flows. </p>
<p>Macroprudential frameworks can play an important role
over the capital flow cycle, and help members harness the benefits of
capital flows.</p>
<li>
Introducing macroprudential measures (MPMs) preemptively can increase the
resilience of the financial system to aggregate shocks, including those
arising from capital inflows, and can contain the build-up of systemic
vulnerabilities over time, even when such measures are not designed to
limit capital flows.
</li>
<li>
While the risks from capital outflows should be handled primarily by
macroeconomic policies, a relaxation of MPMs may assist, as long as buffers
are in place, in countering financial stresses from outflows.
</li>
<li>
Capital flow liberalization should be supported by broad efforts to
strengthen prudential regulation and supervision, including macroprudential
policy frameworks.
</li>
<p>The Fund has two frameworks to help ensure that its advice on MPPs and
policies related to capital flows is consistent and tailored to country
circumstances. The frameworks (the Macroprudential framework and the
Institutional View on capital flows) are consistent in terms of key
principles, including avoiding using MPMs and capital flow management
measures (CFMs) as a substitute for necessary macroeconomic adjustment.&nbsp;</p>
<p>
The appropriate classification of measures is important to ensure targeted
advice consistent with the two frameworks. The conceptual framework for the
assessment of measures laid out in this paper will assist staff in properly
identifying MPMs and measures that are designed to limit capital flows and
to reduce systemic financial risk stemming from such flows (CFM/MPMs), and
thereby ensure the appropriate application of the Fund&rsquo;s frameworks, so
that staff policy advice is consistent and well targeted. The Fund will
continue to develop and share expertise in using MPMs, and integrate these
findings into its surveillance and technical assistance, which should
contribute to building international understanding and experience on these
issues.
</p>