Capital flows in the post-global financial crisis era: implications for financial stability and monetary policy

The last three years have been unusual for the major world economies. Output in advanced economies has slumped, deflation risk has risen, and policy rates have approached the zero limit as central bank balance sheets have greatly expanded. Emerging market economies have also faced challenges: the initial effect of the developed world’s difficulties on them included a sudden reversal in capital flows, currency depreciation, and liquidity problems coupled with negative growth. At a later stage, the picture was reversed with a surge in capital inflows, credit growth and foreign exchange appreciation in the emerging economies. While developed countries coped with the crisis by deploying unusual monetary and fiscal policy measures, emerging market economies combined monetary policy measures with various sets of macroprudential instruments. Hence, the global financial crisis highlighted the importance of using a broader set of instruments for financial stability, and of coherent macroeconomic policies.