Policy formulation from a macroprudential perspective in emerging economies

Recurring capital inflows into emerging economies pose significant challenges to the authorities responsible for maintaining financial stability. Raising interest rates to curb imbalances resulting from capital flows can also attract additional capital, exacerbate appreciation pressures, and jeopardize financial stability. Consequently, authorities have turned to a range of alternative instruments to mitigate the effects of capital flows. This article examines some of these instruments, notably foreign exchange market intervention and the accumulation of international reserves; measures to strengthen bank capital and balance sheets; measures to maintain credit quality or influence its growth or allocation; and capital controls. It also analyzes aspects related to their application, such as the signals to which they must respond, the appropriate timing for implementing prudential measures, and their procyclical nature, effectiveness, and calibration. However, it remains to be determined how the instruments described should be used in combination with interest rate policy. In the medium term, these instruments raise concerns as they could affect the development of the financial system. (Audio: Department of Economic Publications)