Global Shocks and International Policy Coordination

Author: Ashima Goyal and Rupayan Pal

Title: Global Shocks and International Policy Coordination

Abstract: We argue emerging markets (EMs) have become large enough to make it in advanced economies (AEs) own interest to reduce negative spillovers to EMs. It follows the potential for international cooperation in macroeconomic and prudential policy increases. But entrenched perceptions and historical advantages are obstacles. These blocks are explored as well as possibilities in macroeconomic policies and in prudential regulation. Export of capital is a major way AEs earn a share in EM income. AE macroeconomic policy and volatile capital outflows from AEs are a source of negative spillovers for EMs, but preventive prudential regulation is not adequate in AEs. More regulation is likely to reduce short-term returns to capital flows but not long-term, since with fewer crises both AE and EM income streams would rise. Moreover, there is some evidence excess capital flow volatility has adverse effects on AEs themselves. It follows universal macro-prudential polices would benefit both country groups. International conventions should be refocused on reducing the probability of crises, instead of protecting creditors by ensuring they do not suffer a loss in case a crisis occurs. Major source countries should develop prudential regulation of their non-bank financial sectors, including commodity futures markets. The IMF should remove restrictions on pre-emptive implementation of capital flow management and its use before other measures.

Keywords: : International policy coordination; Covid-19; Quantitative easing; Capital flows; Advanced economies; Emerging markets.

JEL Code: F42; F59; F36