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Dealing with the Challenges of Macro Financial Linkages in Emerging Markets

Book Highlights
  • A thorough overview of the evolving macroeconomic and financial stability framework, and the policy options that exist within it, done in the context of advanced economies as well as emerging markets
  • Reviews the unique risks facing emerging markets specifically, and proposes the policy toolkit available to address these risks
  • Volume includes country case studies, outlining the unique experiences of Brazil and the Republic of Korea



Summary
Otaviano Canuto and Swati Ghosh (editors)

The 2008 financial crisis highlighted the challenges associated with global financial integration, emphasized the importance of macro financial linkages and challenged pre-crisis financial stability regimes. Policies in both the macroeconomic and financial sector arenas are now being debated and reviewed, but the debate is currently taking place largely, if not exclusively, in the context of the advanced industrial countries. This is unfortunate, as emerging markets not only face different conditions and have key structural features that can have a bearing on the relevance and efficacy of these policies, but also have had greater experiences with policies aimed at ensuring financial stability.

This volume provides a thorough overview of the evolving macroeconomic and financial stability framework, and the policy options that exist within it. In particular, the volume aims to contribute to a deeper understanding of macro prudential tools, which address systemic risk. This is done in the context of advanced economies as well as emerging markets.

Thus, this volume also reviews the unique risks facing emerging markets specifically, and proposes the policy toolkit available to address these risks. Emerging markets are more exposed to (external) risks than advanced countries, and shocks impact their economies more. This makes macro prudential policies as well as capital flow management tools potentially more useful for emerging markets. In addition, this volume also explores the need for coordination between monetary policies and macro prudential regulation, with an eye on the challenges faced by emerging economies as they cope with this coordination in the current global economic climate

Finally, this volume includes country case studies, outlining the unique experiences of Brazil and the Republic of Korea. Brazil sailed well through the global financial storm. With a focus on specific policies, its case study reviews its recovery in the context of the Brazilian Central Bank’s strong financial sector regulation and macroeconomic management. Korea, on the other hand, faced a set of crisis events in 2008, despite having implemented macro prudential measures prior to the financial crisis. The Korean case study serves to highlight the challenges of implementing macro prudential measures, and their policy objectives and their scope.

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Chapter 1. Adapting Macro Prudential Approaches to Emerging and Developing Economies
Hyun Song Shin

This chapter provides an overview of the policy options that can complement traditional bank regulation and monetary policy tools in reining in financial-sector excesses. Based on existing literature and recent insights, it also provides an analytical framework regarding the motivations for and effects of macro prudential rules on financial institutions.

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Chapter 2. Adapting Micro Prudential Regulation for Emerging Markets
Viral V. Acharya

The financial crisis has led to new micro prudential regulation of financial institutions. This chapter argues that the micro prudential regulatory space (in both advanced and emerging economies) can no longer ignore macro prudential considerations. It concludes with specific important lessons for emerging markets from the crisis and proposed reforms.

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Chapter 3. Capital Flow Volatility and Systemic Risk in Emerging Markets: The Policy Toolkit
Stijn Claessens and Swati R. Ghosh

This chapter reviews the risks facing emerging markets (EMs) and the toolkit available to manage these risks. EMs are more exposed to (external) risks than advanced countries, and shocks impact their economies more. This makes macro prudential policies as well as capital flow management tools potentially more useful for EMs.

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Chapter 4. Monetary Policy and Macro Prudential Regulation: Whither Emerging Markets
Otaviano Canuto and Matheus Cavallari

Confidence in conventional financial stability regimes was shattered by the scale of the financial crisis. This chapter explores the need for coordination between monetary policies and macro prudential regulation. It also points out challenges faced by emerging economies as they cope with this coordination in the current global economic climate.

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Chapter 5. Macro Prudential Policies to Mitigate Financial Vulnerabilities in Emerging Markets
Stijn Claessens, Swati R. Ghosh, and Roxana Mihet

Macro prudential policies have become part of the toolkit of policy makers in many emerging markets and advanced countries. This chapter reviews their analytical foundations, concluding that they offer many potential benefits, especially for emerging markets. This chapter also reviews specific macro prudential policies, focusing on policy design and calibration.

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Chapter 6. Sailing through the Global Financial Storm: Brazil’s recent experience with monetary and macro prudential policies to lean against the financial cycle and deal with systemic risks
Luiz Awazu Pereira da Silva and Ricardo Eyer Harris

Brazil sailed well through the global financial storm. With a focus on specific policies, this chapter reviews its recovery in the context of the Central Bank’s strong financial sector regulation and macroeconomic management. More time is needed to generalize Brazil’s experience and make it a model for other emerging markets.

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Chapter 7. The Operation of Macro prudential Policy Measures: The Case of Korea in the 2000s
Jong Kyu Lee

This chapter reviews the Republic of Korea’s experiences with  macro prudential measures, which were in place prior to the financial crisis. Nevertheless, Korea faced a unique set of crisis events in 2008. The Korean case serves to highlight the challenges of macro prudential operations, their policy objectives and their scope.