Capital Flows, Policy Challenges and Policy Options José Darío Uribe E. Governor central bank of colombia October 13, 2011
Outline Review the fluctuations of macroeconomic aggregates along the cycles of capital flows for a sample of Latin American economies. Describe the policy challenges associated with these capital flow cycles. Summarize the policy options available to policymakers to try to cope with them. A few caveats.
Capital flows cycles Fact # 1: output growth is strongly and positively associated with non-fdi flows and total capital flows. Non FDI private flows Non FD DI private flows Non FDI private flows 0.06 0.11 ARG 0.11 0.05 0 0.06 0.02 0.16 1990 1995 2000 2005 2010 0.11 04 1990 1995 2000 2005 01 2010 CHL COL 0.07 0.12 0.05 0.07 0.05 0.09 0.05 0.09 1990 1995 2000 2005 2010 0.02 MEX 0.07 002 0.02 0.01 0.02 004 0.02 1990 1995 2000 2005 2010 0.06 0 0.02 0 0 0.02 BRA 0.07 0.05 0.01 0.01 1990 1995 2000 2005 2010 PER 0.05 0.13 003 0.01 008 0.08 1990 1995 2000 2005 2010 0.05 GDP growth P growth GD th GDP growt
Capital flows cycles Fact # 2: The real exchange rate appreciates as international capital flows into the economy. Private capital flows capital flows Private flows Private capital 0.07 ARG 126 105 85 64 0.11 1990 1995 2000 2005 2010 43 03 1990 1995 2000 2005 2010 62 CHL COL 0.07 121 0.07 130 0 111 100 0.07 1990 1995 2000 2005 2010 79 MEX 0.08 140 006 0.06 0 90 128 117 105 1990 1995 2000 2005 2010 93 0.01 0.01 0.02 BRA 144 124 103 83 116 101 0.06 1990 1995 2000 2005 2010 73 PER 0.06 106 004 0.02 87 100 1990 1995 2000 2005 2010 82 94 88 RER RER RER
Capital flows cycles Fact # 3: Financial credit to the private sector grows rapidly during a phase of large capital ARG BRA inflows. 0.26 Private capital flows Private capital flows flows Private capital 0.07 0.2 0.43 0.01 0.89 0.49 0.09 0.31 0.1 1990 1995 2000 2005 2010 0.65 1990 1995 2000 2005 2010 0.71 CHL COL 0.07 0.17 0.07 0.3 0 0.11 0.05 0.07 1990 1995 2000 2005 2010 0.07 MEX 0.08 0.4 006 0.06 0 021 0.21 0.16 1990 1995 2000 2005 2010 0.34 0.01 0.02 0.18 0.07 0.06 1990 1995 2000 2005 2010 0.16 PER 0.06 0.38 004 0.02 0.05 022 0.22 0.07 0.08 1990 1995 2000 2005 2010 0.23 Do omestic credit growth credit growth Domestic growth Domestic credit
Capital flows cycles Fact # 4: Asset prices increase during phases of capital inflows.
Table 1: Output growth before and after external financial shocks (Annual % rate)
Table 1: Output growth before and after external financial shocks (Annual % rate)
Table 2 External vulnerability (Current account deficit as a % of international trade)
Policy Challenges Large and persistent RER appreciation episodes: Inability of tradable goods producers to absorb idle Inability of tradable goods producers to absorb idle resources once capital inflows stop leads to an amplified fall in real wages and consumption which reduces welfare.
Policy Challenges Credit Booms: Credit booms are typically later associated with financial crisis and deep contractions of credit. Composition of Capital Flows: Short-term debt flows raise liquidity or currency risk for the real sector and/or the financial system.
Policy Challenges Underdevelopment of domestic financial systems: Markets for hedging against liquidity, term and currency mismatches are typically not well developed, which limits the ability to safely deal with capital inflows.
Policy Options Counter-cyclical monetary policy with a floating exchange rate regime. Counter-cyclical fiscal policy. Sterilization of capital inflows. Financial regulation. Capital controls as a complementary countercyclical policy.
Policy challenges Good luck versus good policies: Origin of the crisis was in advanced economies. Commodity prices in real terms are at historical highs. IMF and Multilateral Banks aid packages, as well as central banks swap agreements. Effectiveness of macroprudential policies Global general equilibrium effects of self-insurance and capital controls
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