RWP 21-10, September 2021; updated September 2022
Emerging markets are concerned about sudden stops in international financial flows, which may lead to severe recessions associated with vicious spirals of currency depreciations and tightening borrowing constraints. A common prescription is to actively manage international capital flows and limit external overborrowing. This paper analyzes the complementary role of domestic macroprudential policies: When domestic markets are shallow, a reallocation of domestic resources towards internationally constrained borrowers improves welfare because it shifts funds to households with a higher marginal propensity to consume. In contrast, if domestic markets are well established, borrowers could simply circumvent the international borrowing constraint with domestic borrowing, which would make any regulation obsolete.
JEL Classifications: F34, F41, E44, D62
Article Citation
Matschke, Johannes. 2021. “Macroprudential Policy Interlinkages.” Federal Reserve Bank of Kansas City, Research Working Paper no. 21-10, September. Available at External Linkhttps://doi.org/10.18651/RWP2021-10