## Reflections on Macroprudential Policy

_IMF News, January 23, 2014_

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## Bibliographic details
- Authors: Naoyuki Shinohara
- Published: January 23, 2014

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### 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.*

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## References

- [People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)
- [Cambodia and the IMF](http://www.imf.org/external/country/KHM/index.htm)
- [India and the IMF](http://www.imf.org/external/country/IND/index.htm)
- [Indonesia and the IMF](http://www.imf.org/external/country/IDN/index.htm)
- [Japan and the IMF](http://www.imf.org/external/country/JPN/index.htm)
- [Malaysia and the IMF](http://www.imf.org/external/country/MYS/index.htm)
- [Myanmar and the IMF](http://www.imf.org/external/country/MMR/index.htm)
- [Philippines and the IMF](http://www.imf.org/external/country/PHL/index.htm)
- [Vietnam and the IMF](http://www.imf.org/external/country/VNM/index.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [Naoyuki Shinohara](https://www.imf.org/external/np/omd/bios/ns.htm)
- [PRESS CENTER](http://presscenter.imf.org/)
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_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp012314a_