international coordination of macroprudential and monetary policy

INTERNATIONAL COORDINATION OFMACROPRUDENTIAL AND MONETARY POLICY

DANIEL HEATH*

ABSTRACT

Macroprudential policy design now considers the role of monetary policy infinancial stability. While traditionally regarded as a blunt, if comprehensive,instrument, monetary policy can enhance or dilute the impact of macropruden-tial regulations. A widening interest in the interaction of the two sets of policytools leads to an examination of the legal and institutional frameworks forpolicy coordination. The cross-border role of monetary policy in macroprudentialregulation and the international coordination of relevant policies receive rela-tively little attention despite the vivid lessons from spillovers and imbalancesduring the Global Financial Crisis. This paper considers the limited efficacy ofthe International Monetary Fund in policy coordination and urges the Fund torigorously examine its approach to financial diplomacy. A minilateralist ap-proach to coordination, embodied in several current proposals, offers hopefulways forward for global macroprudential policy.

I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1094II. INTERACTION OF MACROPRUDENTIAL REGULATION AND

MONETARY POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1097A. Monetary Policy and Financial Stability . . . . . . . . . . . . . . . 1097B. Macroprudential Policy’s Role and Limitations . . . . . . . . . . 1102C. Interaction of Monetary and Macroprudential Policies . . . . . 1105

1. Interaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11052. Advantages of Interaction . . . . . . . . . . . . . . . . . . . 11073. Interaction in Action . . . . . . . . . . . . . . . . . . . . . . . 11094. Complex and Infinite Variations . . . . . . . . . . . . . . 1110

III. THE IMPORTANCE OF INTERNATIONAL COORDINATION . . . . . . . . 1111A. Insufficient International Coordination . . . . . . . . . . . . . . . 1113B. Cross-Border Financial Frictions . . . . . . . . . . . . . . . . . . . . 1116C. Institutional and Framework Approaches . . . . . . . . . . . . . . 1118

1. Structural Agreements . . . . . . . . . . . . . . . . . . . . . . 11192. Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1120

* Daniel Heath is a Distinguished Senior Fellow, Institute of International Economic Law,Georgetown University Law Center and Managing Director of Maxwell Stamp Inc., in Washing-ton, D.C.; he formerly served as United States Alternate Executive Director for the InternationalMonetary Fund. © 2014, Daniel Heath.

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3. Discretion for ad hoc Bilateral/regional PolicyCoordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1120

4. Global Expert Watch Assistance . . . . . . . . . . . . . . 1121IV. THE CHALLENGE TO INTERNATIONAL INSTITUTIONS . . . . . . . . . . 1122

A. Look to the IMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1123B. IMF Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1126C. New IMF Potential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1129

V. MINILATERALISM AND EFFECTIVE FINANCIAL DIPLOMACY . . . . . . . 1132VI. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1135

I. INTRODUCTION

Macroprudential regulation of the finance sector now holds a secureposition in legal and economic policy. An impressive, layered structurewith dozens of multilateral committees built on individual nationalentities of regulators and economic authorities sponsors and consumesresearch and negotiations.1 This is of course one responsible reactionto the recent Global Financial Crisis (Crisis), along with unprec-edented monetary and fiscal interventions and macroprudential regu-lations to stabilize the financial system. Optimism about a new era offinancial stability grows from confidence about new measures and adetermination that such a crisis “will never happen again.”2 There iseven a hopeful assurance—next time it will be different—captured inthe title of a popular history of financial crises.3

That same claim was made in 2000 following the Asian crisis.4 It isworth reflecting that lawyers and economists have been here before thelatest Crisis, and that the previous dedication to macroprudentialpolicy by many in law and economics did not save the sector “this time.”In fairness, knowledge of macroprudential policy’s workings was rudi-mentary fifteen years ago. While our understanding may be greaternow, in fact many financial analysts and economists are aware of howlittle we know about systemic risks and macroprudential tools. In thatregard “this time” is indeed different. While much important work is

1. See generally DAVID GREEN, INTERNATIONAL FINANCIAL REGULATION: ARCHITECTURE AND PRO-CESS, in THE NEW ECONOMIC DIPLOMACY 263-81 (Nicholas Bayne & Stephen Woodcock, eds., 2011).

2. Examples of this ubiquitous post-crisis phrase, and popular demand of policymakers,include Robert Feinberg, AEI Launches Offensive Against FSOC, MONEYNEWS (2014) and GARY B.GORTON, MISUNDERSTANDING FINANCIAL CRISES: WHY WE DON’T SEE THEM COMING (2012).

3. CARMEN M. REINHART & KENNETH S. ROGOFF, THIS TIME IS DIFFERENT: EIGHT CENTURIES OF

FINANCIAL FOLLY (2009).4. See, e.g., OWEN EVANS ET AL., Macroprudential Indicators of Financial System Soundness, in IMF

OCCASIONAL PAPER 10 (2000).

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being done on the interactions and effects under endlessly varyingconditions, we do not definitively know what measures will work, andhow. Studies on the few countries with analytically useful history ofusing macroprudential regulatory tools present ambiguous evidence,though recent theoretical and empirical work shows the benefits ofmacroprudential policy.5 There may well be a non-linear track to thepromised land of financial stability.

Macroprudential thinking and its consequences for global growthand stability is so important that its theorists and practitionersmust welcome insights from any and all disciplines. This is especiallytrue of policy subjects with responsibilities and institutional invest-ments in financial stability. After all, a broad concern or interrelation-ships is inherent in the term macroprudential. Such policies include,inter alia, microprudential, fiscal and structural, competition, supervi-sory, crisis management, resolution, and hitherto less-explored areas ofmacroeconomics.

This Article considers the role of monetary policy in macropru-dential regulation. It reviews current thinking to demonstrate howmonetary policy affects financial stability and, importantly, how it canenhance or diminish macroprudential policy tools. Growing researchwarns that the coordination of monetary and macroprudential policiesis critical to countercyclical management, and an expanding literatureexplores the institutional arrangements to coordinate these policieswithin countries.6 Establishing the national policy frameworks forcoordination is the vital first level, but should be only an interimobjective.

A further goal, international arrangements for macroprudentialpolicies coordination, is much less studied at present. There is, ofcourse, a large body of analysis and venerable international architec-ture for cooperation and even coordination of economic policies.However, the macroprudential mission, at this point, need only strivefor the proximate goal of multilateral coordination of policy variablesaffecting financial stability, though itself a significant challenge. TheCrisis certainly made the general public, like never before, well aware

5. See, e.g., Nicolas Arregui et al., Evaluating the Net Benefits of Macroprudential Policy: A Cookbook(IMF Working Paper WP/13/167, 2013) (as an example of the applied theoretical work).

6. Cheng Hoon Lim et al., Macroprudential Policy: What Instruments and How to Use Them:Lessons from Country Experiences 8 (IMF Working Paper 11/238, 2011); ERLEND NIER ET AL.,INSTITUTIONAL MODELS FOR MACROPRUDENTIAL POLICY 11 n.8 (IMF Staff Discussion Note SDN/11/18, 2011); Erland Nier et al., Towards Effective Macroprudential Policy Frameworks: An Assessment ofStylized Institutional Models (IMF Working Paper WP/11/250, 2011).

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of the international character of finance and of contagion and spillovereffects of national monetary policy on financial stability. A popularexample is the idea of China’s current account surplus leading toexcessive risk-taking on Wall Street.7 More specifically, several emerg-ing market economies have been deploying countercyclical macropru-dential instruments and reserve requirements to manage swings incapital flows that threaten financial and macroeconomic stability.8

Despite the growing evidence of its need, coordination of monetaryand macroprudential policy at the multilateral level for the purposeof strengthening macroprudential regulatory efforts is not well ex-plored. The paucity of research may be due in part to the priorityfocus on policy coordination within countries. Neglect might also beattributed to the perennially low priority placed on multilateralism bynational authorities facing low growth and high unemployment intheir electorates.9

The inattention might also reflect the lack of new ideas about whatto do to improve the situation. The International Monetary Fund(IMF), the likely coordinator of monetary and macroprudential poli-cies, practices a financial diplomacy model based on analysis andconsensus building through expert advice. Yet the IMF knows, orreveals, surprisingly little about how effective its efforts have been andwhat else it might try to improve multilateral monetary coordination.

The conventional financial diplomacy model of the IMF has manyvirtues, and many proposals have been made to strengthen its effective-ness. Efforts to enhance financial diplomacy are critical to the successof macroprudential policy because it is best coordinated multilaterallywith macroeconomic policy. Monetary policy coordination may bemore difficult because often it is less rules-based and mechanisticthan macroprudential regulation. Monetary policy moves the macro-prudential enterprise in a more discretionary direction.10 At the sametime, economists search for economic rules and patterns with which to

7. See, e.g., Lloyd Blankfein, It’s Time to Rethink Financial Services Regulation, GOLDMAN SACHS

(Apr. 2009), http://www.goldmansachs.com/our-thinking/archive/lcb-speech-to-cii.html; BerndBraasch, Central Banks Need to be Wary of ‘New’ Monetary Policy Trends, CENTRAL BANKING (Feb. 28,2013), http://www.centralbanking.com/central-banking-journal/opinion/2251443/central-banks-need-to-be-wary-of-new-monetary-policy-trends.

8. See LIM, supra note 6, at 77.9. JEFFRY FRIEDEN ET AL., AFTER THE FALL: THE FUTURE OF GLOBAL COOPERATION, GENEVA

REPORT ON THE WORLD ECONOMY xvii (2012).10. BIANCA DE PAOLI & MATTHIAS PAUSTIAN, COORDINATING MONETARY AND MACROPRUDENTIAL

POLICIES 25 (2013).


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guide the use of tools. Minilateralist approaches offer a promising wayforward.

Part II of this Article reviews the potential for financial stability andthe limitations, first of monetary policy, second of macroprudentialpolicy, and third of the two policies when interacting. It shows how theaims coincide, but that the capabilities and means can complement orfrustrate achieving the objective under specific conditions. Overallthere is loss of regulatory efficiency when the role of monetary mea-sures is neglected. Part III describes the need for international coordi-nation of monetary policy with macroprudential policy. The growingwork on coordinating these policies on the national level suggestsinstitutional approaches with which to promote an international frame-work. In Part IV, the challenge to international institutions appearsthrough a preliminary examination of the IMF’s experience withmultilateral coordination of policy. Its model of financial diplomacy,based in persuading with expert economic advice, offers little quantita-tive evidence of success and little direction for radically changing itsapproach. Nonetheless, Part V reviews the several proposals since theCrisis, including the IMF’s, to strengthen the expert advice model.While these tend to embody characteristics of minilateralism, a bolderminilateralist design would likely improve financial diplomacy in theservice of the financial stability goals of macroprudential policy.

II. INTERACTION OF MACROPRUDENTIAL REGULATION AND

MONETARY POLICY

Macroprudential policy, like many subjects in law and economics,does not function in isolation but interacts with other policies that bearon systemic risk. It is integrated especially with monetary policy instru-ments and theory because monetary policy operates through thefundamental financial channel of interest rates and aggregate creditsupply. Moreover, the financial sector often falls under the regulatoryeye of the monetary authority, the central bank. This Part demonstrateshow monetary policy is important in itself for financial stability, and as apartner with macroprudential policy, and properly belongs as part ofinternational financial regulatory policy.

A. Monetary Policy and Financial Stability

Monetary policy aims to achieve price stability and stable economicgrowth by determining the conditions that affect the supply anddemand for credit. In recent decades this primary function appearedsufficiently successful to forestall much inquiry into the working of


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monetary tools on financial stability.11 Most monetary economistsagreed that flexible inflation targeting was sufficient for conductingmonetary policy, that it would achieve financial stability, and that theframework of monetary policy could deal with international spillovers.The Crisis revealed financial instability—growing imbalances—be-neath the placid macroeconomic surface of stable growth and lowinflation. Regulators turned to macroprudential instruments and econo-mists are reconsidering the ways and conditions under which the sideeffects of monetary policies can greatly affect financial stability.

While not regarded as a direct instrument for financial stability inrecent decades, monetary policy uses macroeconomic managementtools for price stability—inflation targeting and short-term interestrates—that gives it a potential for financial stability.12 Indeed, changesin interest rates affect not only aggregate demand and supply but alsofinancial conditions through asset prices, borrowing constraints, risk,collateral constraints, cost of intermediation, financial distortions bothon the demand and supply side of credit, or borrowers’ quality, leadingto higher default rates13 in widely observed ways, including:

● Low interest rates lead banks to expand their balance sheets andreduce diligence in approving borrowers,14 or to seek higher returnsdespite increased risk,15 especially if low rates persist or are expectedto be lowered.16 Low interest rates boost asset prices, inducing moreleverage and asset price booms that fuel the financial cycle.17

● Rises in interest rates can reduce lending margins, and lead banks,

11. OTAVIANO CANUTO & MATHEUS CAVALLARI, MONETARY POLICY AND MACRO PRUDENTIAL

REGULATION: WHITHER EMERGING MARKETS 122 (2013).12. See generally OLIVIER BLANCHARD ET AL., RETHINKING MACROECONOMIC POLICY (2010).13. Franklin Allen & Douglas Gale, Bubbles and Crises, 110 THE ECON. J., no. 460, 236, 237

(2000); Gerhard Illing, Financial Stability and Monetary Policy—A Framework 12-13 (CESifo WorkingPaper Series No. 1971, 2007); Charles Goodhart et al., Foreclosures, Monetary Policy and FinancialStability, Conference Proceedings of the 10th International Academic Conference on Economicand Social Development, Moscow (2009).

14. Claudio Borio & Haibin Zhu, Capital Regulation, Risk-Taking, and Monetary Policy: A MissingLink in the Transmission Mechanism? (BIS Working Paper No. 268, 2008).

15. Raghuram Rajan, Has Finance Made the World Riskier?, 12 EUR. FIN. MGMT. no. 4, 499(2006).

16. Emmanuel Farhi & Jean Tirole, Collective Moral Hazard, Maturity Mismatch and SystemicBailouts, 102(1) AM. ECON. REV. 60 (2012).

17. Ben S. Bernanke & Mark Gertler, Agency Costs, Net Worth, and Business Fluctuations, 19(4)AM. ECON. REV. 14 (1989); Should Central Banks Respond to Movements in Asset Prices?, 91 AM. ECON.REV. 253 (2001).


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especially poorly capitalized ones, to accept more risk,18 particularlyas a crisis looms, when leverage is high and competition limits thepass-through of policy rates to lending rates. Interest rate rises canflatten the yield curve and lead to riskier profit-seeking.19 Tightermonetary stances can excessively constrain collateral, and devastateasset prices.20

● Interest rate increases can attract capital to open economies,appreciating the currency and encourage excessive foreign currencyborrowing, with onerous repayment when the currency depreci-ates.21 Through its influence on exchange rates, monetary policyre-prices collateral and affects borrowing constraints.Whether the change in monetary stance is beneficial or adverse

to financial stability, the strength of the effect depends on externalfactors. The economy’s position in the financial cycle is one. Inupswings as financial imbalances build up, low interest rates can reducecurrent defaults, but can also encourage riskier lending and moreleverage, short-term borrowing, and foreign currency borrowing. Asthe cycle turns and rates are raised, risk-shifting, tightening of borrow-ing constraints and defaults ensue. The monetary stance tightensborrowing constraints and can worsen asset-price and exchange-rateexternalities and leverage cycles. Then, the expectation of monetaryeasing can induce risk correlating.22

A second factor bearing on monetary policy’s influence on financialstability is the financial effects of monetary policy on credit extensionby banks,23 though risk-taking and risk-shifting channels may alsoevade some control by working through non-banks. Furthermore,in open economies, domestic monetary policy has less influence on

18. Sudipto Bhattacharya, Aspects of Monetary and Banking Theory and Moral Hazard, 37 J. FIN.371 (1982).

19. Ouarda Merrouche & Erlend Nier, What Caused the Global Financial Crisis? Evidence on theDrivers of Financial Imbalances 1999-2007 (IMF Working Paper No. WP/10/265, 2010).

20. Hyun Song Shin, Financial System Liquidity, Asset Prices and Monetary Policy, The ChangingNature of the Business Cycle, Reserve Bank of Australia Annual Conference Volume, No. acv2005-16 (2005).

21. Valentina Bruno & Hyun Song Shin, Bank for Int’l Settlements, Capital Flows and theRisk-Taking Channel of Monetary Policy (Working Paper No. 400, 2012); Joon-Ho Hahm et al.,Macroprudential Policies in Open Emerging Economies (Nat’l Bureau of Econ. Research Working PaperSeries 17780, 2012).

22. STIJN CLAESSENS ET AL., INT’L MONETARY FUND, THE INTERACTION OF MONETARY AND MACRO-PRUDENTIAL POLICIES (2013).

23. Yener Altunbas et al., Do Bank Characteristics Influence the Effect of Monetary Policy on BankRisk? (European Cent. Bank Working Paper Series, No. 1427, 2012).


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domestic long-term rates and asset prices, while exchange rates be-come more important.24 High interest rates can induce capital inflowsand foreign exchange borrowing, as happened in Eastern Europeahead of the Crisis. When the central banks lowered rates in thedownturn, the exchange rate worsened with consequently difficultexternalities.25

At the same time that monetary policy can have various types anddegrees of impact on financial stability, it has limitations under variouscircumstances. First, monetary tools by themselves are of little use incases where instability arises from causes other than liquidity in thesystem, or where asset price and inflation cycles diverge. Second,because monetary policy affects the entire economy, the job of prickingan asset price bubble or targeting a single overheated sector or regionmay require large changes in interest rates that cause costly distortionselsewhere in the economy, such as lost output and unemployment.26

Third, where lower priced capital abroad is available an interest raterise might have less impact on credit expansion than expected. Fourth,under economic stress sizable rapid changes in risk premiums couldoffset or diminish the impact of policy rate changes on credit growthand asset prices.27

Beyond its limitations, monetary policy’s pursuit of financial stabilityin certain circumstances may be harmful. Interest rate levels intendedto achieve financial stability could differ from levels best for macro-economic stability, and that discrepancy could skew inflation expecta-tions.28 For example, if the inflation outlook and target are consistent,changing interest rates for financial stability objectives could under-mine the policy framework.

More concerning, it is possible for monetary policy to undermine

24. RAMON MORENO, BANK FOR INT’L SETTLEMENTS, MONETARY POLICY TRANSMISSION AND THE

LONG-TERM INTEREST RATE IN EMERGING MARKETS 61-79 (2008); see CLAESSENS, supra note 22 at 8.25. GIOVANNI DELL’ARICCIA ET AL., POLICIES FOR MACROFINANCIAL STABILITY: HOW TO DEAL WITH

CREDIT BOOMS 33-36 (IMF Discussion Note SDN/12/06, 2012); see CLAESSENS, supra note 22 at 10.26. Charles Bean et al., Monetary Policy After the Fall, Macroeconomic Challenges: The Decade

Ahead, Proceedings of the Federal Reserve Bank of Kansas City Economics Symposium at JacksonHole (2010).

27. Donald L. Kohn, Monetary Policy and Asset Prices Revisited, Speech at the CatoInstitute’s 26th Annual Monetary Policy Conference (2008); BANK OF ENGLAND, THE ROLE OF

MACROPRUDENTIAL POLICY (2009).28. Claudio Borio & P. Lowe, Bank for Int’l Settlements, Asset Prices, Financial and Monetary

Stability: Exploring the Nexus (Working Paper No.114, 2002); Frederic S. Mishkin, The TransmissionMechanism and the Role of Asset Prices in Monetary Policy (NBER, Working Paper No. 8617,Dec. 2001).


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financial stability even when interest rates are achieving price sta-bility. As in the period of both low interest rates and inflation beforethe Crisis, there was excessive credit growth and asset bubbles, re-sulting in financial instability. For countries combatting inflation withinterest rate rises—for stimulating domestic demand with interest ratecuts—the resulting cross-border capital flows may destabilize domesticfinance.

In fact, long-term global financial integration has weakened do-mestic monetary control. Former U.S. Federal Reserve Chairman BenBernanke argued that a global savings glut reduced long-term interestrates in advanced economies, weakening its connection with short-termrates and therefore the impact of policy rates on asset prices.29 Thiseffect limits monetary policy’s potential role in financial stability.

Current research recognizes a renewed role for monetary policy incountercyclical management.30 Two topics demonstrate this. First,the monetary policy function of “leaning against the wind,” recallingFederal Reserve Chairman William McChesney Martin’s expression ofordering “the punchbowl removed just when the party was reallywarming up,”31 finds more vigorous expression in discussion of mon-etary policy’s ability to detect and prick asset price bubbles. Seminalwork by Bernanke and Gertler32 is skeptical, but more recent re-search33 suggests a more active role for monetary policy than justrestoring stability after a crisis, or “lean versus clean.”34

A second area of new work examines current unconventional mon-etary policy (UMP). Many analysts, and the IMF’s Global Financial

29. Ben S. Bernanke, Chairperson, Fed. Res., The Global Savings Glut and the U.S. CurrentAccount Deficit, Speech at the Federal Reserve Board of Governors (2005).

30. See, e.g., Shyamala Gopinath, Asian Dev. Bank Inst., Macroprudential Approach to Regulation—Scope and Issues (Working Paper No. 286, 2011); Luiz Awazu Pereiro da Silva & Ricardo EyerHarris, Banco Central do Brasil, Sailing Through the Global Financial Storm: Brazil’s Recent Experience withMonetary and Macroprudential Policies to Lean Against the Financial Cycle and Deal with Systemic Risks(Working Paper Series No. 290, 2012); BLANCHARD, supra note 12, at 9.

31. William McChesney Martin Jr., Federal Reserve System Board of Governors Speech,Address before the New York Group of the Investment Bankers Association of America 12(Oct. 19, 1955).

32. See Bernanke, supra note 17.33. Olivier Blanchard, Bubbles, Liquidity Traps, and Monetary Policy, 13 INST. FOR INT’L ECON.

(2000); Claudio Borio & William White, Bank for Int’l Settlements, Whither Monetary and FinancialStability? The Implications of Evolving Policy Regimes (Working Paper, 2003).

34. Marcelo Madureira Prates, Banco Central do Brasil, Why Prudential Regulation Will Fail toPrevent Financial Crises. A Legal Approach (Working Paper Series No. 335, 2013) (arguing for anemphasis on cleaning up after a crisis rather than relying on countercyclical management).


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Stability Report,35 caution that risks are building because of very lowand persistent interest rates. This “zero lower bound” research exam-ines how central banks can pursue financial stability goals with un-known effects and opaque transmission mechanisms.36 The fear ofrekindled financial risks as investors chase higher yields provoked by anextended period of low interest rates attests to the effect of monetarypolicy on financial stability.

B. Macroprudential Policy Role and Limitations

Macroprudential policy is designed to contribute to financial stabilityby limiting systemic vulnerabilities and procyclical tendencies. Macro-prudential measures can constrain unsustainable credit booms andhelp monetary policy stabilize an economy by reducing the impact ofshocks on the provision of credit. In the wake of the Crisis, research,design, international negotiations, and the use of macroprudentialpolicy tools are rapidly expanding.37 There is plentiful expectation thatmacroprudential policy provides a formulaic remedy for conditionsthat led to the Crisis. Experts have created “toolkits” and “cookbooks”even as understanding of financial stability, macroprudential regula-tory tools, and the policy framework scurries to catch up with wide-spread expectations.38 Macroprudential policy does not disappointwhen it augments monetary policy’s limitations. While the interest ratetool is too blunt, as it impacts all lending economy-wide—whethercausing or correcting instability39—macroprudential regulations canbe targeted at the sectors or areas needing help. Macroprudentialpolicy can assuage a credit cost shock for small businesses, but not largeones for instance, without distorting personal consumer behavior.Unlike monetary policy, it can set different effective interest rates by

35. INT’L MONETARY FUND, DO CENTRAL BANK POLICIES SINCE THE CRISIS CARRY RISKS TO

FINANCIAL STABILITY? GLOBAL FINANCIAL STABILITY REPORT: OLD RISKS, NEW CHALLENGES 93-126(2013).

36. TAMIM BAYOUMI ET AL., MONETARY POLICY IN THE NEW NORMAL (IMF Staff DiscussionNote SDN/14/3, 2014); see BLANCHARD, supra note 33, at 4.

37. DIANA BONFIM & NUNRO MONTEIRO, BANCO DE PORTUGAL, THE IMPLEMENTATION OF THE

COUNTERCYCLICAL CAPITAL BUFFER: RULES VERSUS DISCRETION (Financial Stability Report, 90-92,2013).

38. Financial Stability Board, International Monetary Fund & Bank for International Settle-ments, Macroprudential Policy Tools and Frameworks, Update to G20 Finance Ministers and CentralBank Governors (Feb. 2011); see Arregui, supra note 5.

39. See, e.g., JONATHAN D. OSTRY ET AL., CAPITAL INFLOWS: THE ROLE OF CONTROLS (IMF StaffPosition Note SPN/10/04, 2010).


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region or loan type. This function can supplement monetary policy.Macroprudential tools affect the cost of capital, interacting with theimpact of policy interest rates, but with more specific effects. Thus theycan be both independent and coordinate with interest rate goals ofprice stability. Macroprudential policies can also contain the adverseeffects of monetary policy on financial stability, diminishing conflicts inthe pursuit of monetary policy.

But macroprudential policy has its limitations and shortcomings. Justas the Crisis showed price stability insufficient for financial stability, somacroprudential policy alone provides no guarantee of financial stabil-ity. Economists conclude that among the few countries with experiencein macroprudential regulation, Spain, Columbia, and Peru, have hadlimited success.40 The dynamic provisioning in place for years in Spaindid not stop its real estate bubble in the decade leading up to 2008 orlessen the subsequent savings bank problems of 2009-2010.41 Econo-mists do not know conclusively whether macroprudential tools canprevent or contain credit and asset price bubbles.

Indeed, given current limited knowledge, macroprudential policiesmay not operate perfectly. Imperfect knowledge can yield inaccuratelytargeted or excessively tight macroprudential policies, constraining atthe wrong time or place with negative effects.42 Financial stabilityprospects are difficult to delineate, frustrating accurate macropruden-tial loosening or tightening. Or, coincidental side effects of an interven-tion ameliorate or exacerbate some other propeller of instability. Suchimperfections in responding to financial conditions make macropruden-tial policy, where limited or static, more reliant on monetary policy thatmust be pursuing its primary mission in inflation and output.43 Mon-etary policy could helpfully lean against the credit cycle.

40. Santiago Fernandez de Lis & Alicia Garcia-Herrero, Asian Dev. Bank Inst., DynamicProvisioning: Some Lessons from Existing Experiences (Working Paper No. 218, 2010). Other recentexamples are encouraging, such as: Longmei Zhang & Edda Zoli, Int’l Monetary Fund, LeaningAgainst the Wind: Macroprudential Policy in Asia (Working Paper No. WP/14/22, 2014); Ivo Krznar &James Morsink, Int’l Monetary Fund, With Great Power Comes Great Responsibility: MacroprudentialTools at Work in Canada (Working Paper No. WP/14/83, 2014).

41. Ray Barrell & E. Philip Davis, Financial Regulation, 216 NAT’L INST. ECON. REV. F4, F7(2011); Jesus Saurina, Loan Loss Provisions in Spain. A Working Macroprudential Tool 17 (Revista deEstabilidad Financiera of the Banco de Espana, 2009).

42. See generally Ricardo Caballero & Arvind Krishnamurthy, Smoothing Sudden Stops, 119 J. ECON.THEORY (SPECIAL ISSUE) 1, 104-27 (2004).

43. Vasco Curdia & Michael Woodford, Bank for Int’l Settlements Credit Frictions and OptimalMonetary Policy 43 (Working Paper No. 278, 2009); Charles Carlstrom & Timothy Fuerst, OptimalMonetary Policy in a Model with Agency Costs, 42 J. MONEY CREDIT & BANKING 3 (2010).


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Additional factors can restrict macroprudential policy’s effectivenessin containing systemic risk. Institutional constraints make it unlikely tobe targeted perfectly or able to completely offset financial shocks.Politics may restrain the use of unpopular tools that impact powerfulwinners and losers. And institutional arrangements may limit thedeployment of instruments that require political approval.

Moreover, like monetary policies, macroprudential policies can gen-erate side effects. Macroprudential measures can unintentionally affectaggregate supply and demand, like changes in interest rates do. Byconstraining borrowing and expenditure, even if only in areas experi-encing the financial instability, macroprudential policies affect overalloutput. The policies can have macroeconomic spillovers, throughsuppressing or enhancing the economic cycle, or by direct change toavailability of credit.44 These distortions may burgeon when macro-prudential tools are deployed to manage aggregate demand, whichshould not be a primary aim of macroprudential policies. Macro-prudential tools alone may be insufficient to control asset prices,interest or exchange rates, which are determined by many factors andpolicies. In fact, IMF analysts conclude that macroprudential policyshould focus on containing systemic vulnerabilities and not be bur-dened with broader macroeconomic objectives, like influencing thelevel and composition of aggregate demand.45

A feature of macroprudential instruments that could weaken effec-tiveness is its vulnerability to regulatory arbitrage. A disadvantage ofregulations protecting financial stability is that they can be avoided.Tighter regulations strengthen rewards for circumvention, causingvulnerabilities to build up beyond the regulatory perimeter and leak-age in policy effect. In contrast, the blunt but comprehensive policyinterest rate that determines the cost of borrowing cannot easily becircumvented. As is often said, monetary policy sets the universal priceof leverage in a given currency.46

44. D. Feliz Unsal, Int’l Monetary Fund, Capital Flows and Financial Stability: Monetary Policyand Macroprudential Responses 4 (Working Paper, 2013).

45. CLAESSENS, supra note 22.46. Claudio Borio, Macroprudential Policy and the Financial Cycle: Some Stylized Facts and Policy

Suggestions, IMF Conference Rethinking Macro Policy II: First Steps and Early Lessons, 5 (2013);Bank for Int’l Settlements, The Financial Cycle and Macroeconomics: What Have We Learned? 22(Working Paper No. 395, 2012); On Time, Stocks and Flows: Understanding the Global MacroeconomicChallenges, 225 NAT’L INST. ECON. REV. 1 (2013); Jaime Caruana, Monetary Policy in a World WithMacroprudential Policy, Speech at the SAARCFINANCE Governors’ Symposium, 5 (2011); Interna-tional Monetary Policy Interactions: Challenges and Prospects, Speech at the CEMLA-SEACEN Confer-ence (2012).


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Macroprudential policy operates best in collaboration with otherpolicy areas and tools, principally monetary policy, but also includingfiscal and competition policies, just as monetary policy is helpfullyreinforced by macroprudential policy. Macroprudential policies aloneare likely to be ineffective in containing systemic risk arising frommacroeconomic imbalances. The powerful financial cycle cannot betamed with macroprudential instruments alone. Macroprudential policyneeds the support of monetary policy, for instance by leaning againstthe buildup of imbalances even if inflation is subdued.

Despite the limitations and complexities of macroprudential policy,policymakers may tend to rely excessively on its tools, in part to protectmonetary policy. The danger in so doing depends on, inter alia, thenature of the economic shock. Macroprudential instruments can helpprice and financial stability particularly in financial shocks, but inshocks to demand or productivity, degrees of substitution and comple-mentarity must be judged.

C. Interaction of Monetary and Macroprudential Policies

Financial stability is affected by many policies beyond those that aremacroprudential, but the linkages of macroprudential policy are espe-cially strong with monetary policy. Both macroprudential policy andmonetary policy work for financial stability and can usefully comple-ment each other rather than substitute. Monetary policy can impactfinancial stability and macroprudential tools can influence inflationand output. With macroprudential policy’s limitations, monetary policymust help to address financial vulnerabilities and financial shockswhether contractionary or expansionary. Equally, where monetarypolicy’s impact is limited, the reliance on macroprudential policyincreases. It is therefore important to coordinate the use of themonetary policy rate to the countercyclical macroprudential policyinstrument. Financial stability requires both policy tools.

1. Interaction

These two policy areas interact with each other and can expand ordiminish each other’s effectiveness through complementarities andcreating space for the other’s operation, along with extending theiroverall comprehensiveness. Monetary policy pursuing price stabilitymay harm financial stability and so must take that into consideration.Macroprudential policy therefore can alleviate this requirement ofmonetary policy, but not entirely, since macroprudential policy cannotbe expected to be fully effective. The same is true for macroprudential


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policy pursuing financial stability. It is axiomatic that macroprudentialpolicy, with its cyclical and systemic orientation, will have impactbeyond the financial sector, and interact with monetary policy.47

The interaction is not simple. For instance, in a positive shock withcredit demand expanding and inflation falling, monetary policy willease to increase credit but macroprudential policy responding to creditgrowth unmindful of macroeconomic requirements will stifle thedesired expansion.48 The asymmetry between financial and macro-economic stability objectives must be resolved through discretionarycoordination. Thus, the interactions demonstrate the need for a strongpolicy framework and for coordination, while preserving the indepen-dence of the economy. The demanding job of accommodating theoften-different cyclicality of the business and financial cycles requirescoordinated policies.

Research on interaction between financial and macroeconomic sta-bility is in its infancy. Macroprudential policy design increasinglyconsiders the monetary policy preconditions for financial stability.Monetary and macroprudential tools can interact variously to bear onfinancial distortions. The ex ante view of the appropriate interventionfor financial stability may be ambiguous and difficult to calibrate.Several effects and channels may be operating with their intensitiesdepending on the financial structure, phase of the financial cycle, andother country characteristics. Further policy adjustments can help tocalibrate these effects. Only fairly recently have several studies startedanalyzing interactions between monetary policy and macroprudentialmeasures. Less known, but with growing interest, is the optimal policymix for when the imperfect macroprudential policy needs complement-ing from monetary policy.49 While policy interaction is inevitable, giventhat both operate in the economy, and that left alone they will interactoften inefficiently or at cross purposes, and the purpose of policycoordination is to get macroprudential and monetary policies to inter-act effectively, a framework and institutional arrangement is needed.Policy interaction in this context means coordinated interaction. Thisis distinct from uncoordinated interaction, where policies do notautomatically self-correct. There are many circumstances under whichthe two policies areas naturally compensate for the other’s inadequacy

47. See Caruana, supra note 46.48. See Unsal, supra note 44, at 5.49. ERLAND NIER ET AL., INT’L MONETARY FUND, THE INTERACTION OF MONETARY AND MACRO-

PRUDENTIAL POLICIES—BACKGROUND PAPER 4 (2012); See also NIER, supra note 6, at 4.


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or correct its distortions; but there are other areas where they do not.Research is examining these areas.50

Fundamental to research on interaction and coordination arrange-ments is an understanding of the division of responsibility. Macro-prudential policy clearly cannot be a substitute for sound monetarypolicy. Recent research shows that the priority for monetary policiesoperating along with macroprudential policy must remain on pricestability, correcting macroeconomic imbalances, while macropru-dential policy’s prime focus is on containing systemic financial sectorrisks.51 Such clear mandates serve to protect the independence andspace necessary to maintain price stability, countercyclical manage-ment, and financial stability.52 This guidance is, of course, subject tothe circumstances where monetary policy may still need to respondto financial sector distortions, and macroprudential policy is neededto assist in countercyclical macroeconomic stability objectives. Onan elementary level, an asset price bubble may call for the standardrise in capital requirements, intending to deflate the price bubble byalso widening bank lending margins. At the same time, inflation mayrequire a lower interest rate to return it back to central bank’starget. The interaction of the two tools could well keep the pricebubble going or start a different one, depending on many otheroscillating factors.

2. Advantages of Interaction

Financial stability is more readily attained in diverse economic cir-cumstances, when there is defined interaction. A strong policy frame-work is important to diminishing conflicts and creating space formonetary policy to pursue price stability and for macroprudentialpolicy to contain financial risks in a complementing manner. Theframework enables policy instruments to address distorting side effectsof policy at their source. This can reduce the pressure on policy to“lean” against financial vulnerabilities.53 Appropriate interaction of thepolicies promotes financial stability.

50. PAMFILI ANTIPA & JULIEN MATHERON, Interactions Between Monetary and MacroprudentialPolicies, in BANQUE DE FRANCE FINANCIAL STABILITY REVIEW No.18, 225-40 (2014); see CLAESSENS, supranote 22, at 3.

51. See CLAESSENS, supra note 22, at 3.52. JAN BROCKMEIJER ET AL., INT’L MONETARY FUND, KEY ASPECTS OF MACROPRUDENTIAL POLICY

10 (2013).53. Id.


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Interaction of monetary and macroprudential policies generallyyields more synergies than conflicts, a condition conducive for finan-cial stability.54 This arises even with the complexity of variable optimalpolicy mixes according to such factors as the type, size, and timing ofthe shock to the economy. Targeted macroprudential policy may bebest and sufficient for a financial shock. Both macroprudential andmonetary policies in concert can be tightened in the case of anaggregate demand shock that expands both credit and inflation.Productivity shocks may require monetary policy easing (in response togoods market disinflation) complemented by macroprudential policytargeted at the leverage build up (in response to the rise in asset pricesand credit demand), depending on the strength of the linkage ofincreases in credit to aggregate financial risks.55 The interaction of thetwo policy areas produces a more beneficial response to the economicshock.

A further benefit of interaction is a more resilient system. Macro-prudential interventions that reduce risks and create buffers assistmonetary policy in addressing financial shocks, especially constraintslike the zero lower bound in interest rates or the capital outflowsinduced by interest rate cuts.56 The interactions affect the conduct ofboth policies: When macroprudential policies strongly affect output,more accommodative monetary policy can offset it, and when mon-etary policy makes risk-taking too attractive, relevant macroprudentialpolicies can offset that.

In addition, coordinated policy interaction can work to contain theshortcomings of macroprudential and monetary policy. Unwanted sideeffects of monetary policy on financial stability can cause dissonancebetween financial and price stability goals—such as when a necessarytightening monetary stance increases defaults. Macroprudential poli-cies can assuage such side effects and create additional space formonetary policy to function by easing on debt-to-income (DTI) ratios,which dampens an unwanted transmission of higher interest rates tohousehold defaults.57 This also can help protect bank balance sheetsand reduce distress sales of assets, increasing financial stability. When

54. Id. at 9; see also CLAESSENS, supra note 22, at 13; NIER, supra note 49, at 6; BORIO, supranote 33.

55. See NIER, supra note 49, at 6.56. See BROCKMEJIER, supra note 52, at 10.57. DENIZ IGAN & HEEDON KANG, INT’L MONETARY FUND, DO LOAN-TO-VALUE AND DEBT-TO-

INCOME LIMITS WORK? EVIDENCE FROM KOREA (2011).


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interest rates increases squeeze lending margins and profits, macro-prudential liquidity measures that encourage longer-term bank fund-ing can contain the incentive for further risk-shifting. When lowinterest rates create incentives for risk-taking and increases in bankleverage, rises in capital requirements or a tighter leverage ratio canprotect monetary policy from financial instability effects.58 When eas-ing monetary policy boosts asset prices, a lower loan-to-value (LTV)ratio can tame house price booms and reduce potential bubbles.59

Where monetary stances cause destabilizing cross-border capital flows,macroprudential measures reduce the systemic risk by easing flows andchanging their composition away from short-term and foreign denomi-nated liabilities and reduce default risks.60

3. Interaction in Action

The requirements of coordination appear in the interaction ofillustrative monetary and macroprudential policy instruments. First,macroprudential capital buffers, when increased, may reduce creditand output, which may need to be countered by looser monetarypolicy. The need for monetary policy to offset the effects of tightercredit conditions on output would be reduced in the presence of adynamic capital buffer. Second, macroprudential LTV ratio increasesthat subdue housing price rises and household debt also can reduceaggregate demand. This requires an adjustment in the optimal mon-etary policy, and this suppression during a cyclical upturn may requirelooser monetary policy.61 Third, reserve requirements can be varied—adjusting the spread between lending and deposit rates—to affect theamount of credit offered. However, unlike capital buffers, reserverequirements do not impact banking system resilience, and reserverequirements increases can promote risk-shifting, cause nominal depre-ciation, and affect capital inflows.62 In small open economies, reserverequirements can curb credit growth induced by interest rates, and in

58. See Farhi, supra note 16.59. CHRISTOPHER W. CROWE ET AL., HOW TO DEAL WITH REAL ESTATE BOOMS (IMF Staff

Discussion Note 11/02, 2011); IGAN & KANG, supra note 57; Tak-chuen Wong et al., Hong KongMonetary Auth., Loan-to-Value Ratio as a Macroprudential Tool—Hong Kong’s Experience and Cross-Country Evidence (Working Paper 01/2011, 2011).

60. See Hahm, supra note 21.61. INT’L MONETARY FUND, The Changing Housing Cycle and the Implications for Monetary Policy, in

WORLD ECON. OUTLOOK, 103-32 (2008).62. See NIER, supra note 49, at 14-16.


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downturns, lowering reserve requirements can expand credit without aresulting exchange rate depreciation or capital flight, unlike an inter-est rate drop.63

Unsurprisingly the interaction of macroprudential tools and mon-etary policy may differ with the tools considered. LTV ratio limitsand dynamic capital buffers boost resilience against aggregateshocks, subduing output effects of a credit crunch and housing bust.In turn, easing monetary policy will be less necessary, keeping opentransmission channels in a downturn. Tightening LTV ratios andcapital requirements in upturns can affect asset prices and credit andthen output, but easing monetary policy can counter these effects.Reserve requirements complement monetary policy since it can con-trol credit growth, providing maneuvering space for monetary policyfacing destabilizing capital flows, though the effects on output areunclear and relatively minor.

In addition, the interaction between monetary and macroprudentialpolicy depends on specific conditions. Research suggests that monetarypolicy may effectually lean against the credit cycle when macropruden-tial policies operate imperfectly, but there are numerous conditionsunder which this may not be the best course.64 In the current historiclow interest rate environment further easing to check credit growthmight not be warranted in all cases. Following a shock, asset prices andcredit do not always move in the same direction, so further research isneeded on the interaction of monetary and macroprudential impactson financial stability.

4. Complex and Infinite Variations

The interaction of macroprudential and monetary policies producesmany variations of effects, calling for numerous different optimalpolicy mixes. These could expand seemingly infinitely because of theendless set of circumstances in which the distortions and instabilitydevelop and call for policy responses. In addition, the institutional andpolitical interaction might not provide sufficient mutual support, andis not sufficiently symmetrical between financial booms and busts, withthe inadequate tightening during booms risking depleted buffersduring busts. This shrinks the maneuvering space, and progressively sowith each cycle. Policy horizons may not match the duration of the

63. Pablo Federico et al., Macroprudential Policy Over the Business Cycle, Banco de EspanaConference on Debt and Credit, Growth and Crises (2012).

64. See NIER, supra note 49.


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financial cycle.65 In addition, unforeseen technology and productinnovation in a creative financial sector is likely to increase complexity.And the integration of macroprudential with monetary policy makesthe area of countercyclical management for financial stability morediscretionary, requiring judgment in the optimal mix of rules—a tiltfrom science to art. Policy decisions and framework design can useestimates of the quantitative importance of the interactions of mon-etary and macroprudential policies.66

The interaction of macroprudential and monetary policies is un-avoidable because they work on and through overlapping areas. Theirimpacts are most complementary for financial stability when they arecoordinated amidst complex and changing economic circumstances.The complexity compounds when a cross-border dimension is added,and the capacity for international coordination must be robust, as PartIII demonstrates.

III. THE IMPORTANCE OF INTERNATIONAL COORDINATION

The desirability of coordinated macroprudential and monetary poli-cies is self-evident from their characteristics, their interactions, and therequirements of financial stability. It is clear that both policy areasinteract, under certain circumstances with significant impact, and theyinfluence international financial stability in complex ways. Financialstability action, as well as the absence of it, can generate distortingspillovers across national borders, calling for international coordina-tion of countercyclical policies. The export of financial stability risksand one country’s loose monetary policy or regulation can affectlending booms and financial instability abroad, as cases of spilloverand contagion in the Crisis show.67 There have been regular callsfor international coordination in the media and academic research,especially on the advanced economies’ unconventional monetary policy(UMP) and the emerging economies’ capital flow management(CFM).68 In addition, some observers fear the G20 is losing steam and

65. Claudio Borio, On Time, Stocks and Flows: Understanding the Global Macroeconomic Challenges,225 NAT’L INST. ECON. REV. 1 (2013).

66. See ANTIPA & MATHERON, supra note 50.67. Kimberly Beaton & Brigitte Desroches, Bank of Canada, Financial Spillovers Across Coun-

tries: The Case of Canada and the United States (Discussion Paper 2011-1, 2011); Alessandr Galesi &Silvia Sgherri, Int’l Monetary Fund, Regional Financial Spillovers Across Europe: A Global VAR Analysis(Working Paper, 2009) (using a GVAR model framework to measure the transmission of effects).

68. DUVVURI SUBBARAO, FINANCIAL REGULATION FOR GROWTH, EQUITY AND STABILITY IN THE

POST-CRISIS WORLD 1-8 (BIS Paper No. 62, 2012); R. BAQIR & V. CHENSAVASDIJAI ET AL., INT’L


2014] 1111

the opportunity to institute a financial stability framework sufficient toavoid another global crisis.69 The IMF and Financial Stability Board(FSB) have warned of a new build-up of macroeconomic imbalances.70

In emerging economies, foreign factors have become more importantas the domestic short and long interest rates correlate less71 and for thespreading cross-border banks, global monetary conditions rather thanlocal appear to matter more.72

In a financially integrated global economy with complex interac-tions, effective macroprudential policy requires a multilateral perspec-tive. Collective action problems occur not just at the national but alsoat the international level. Even when each country’s macropruden-tial policy is optimal at the national level, the overall combination ofmacroprudential policies may be suboptimal when financial cycles arenot synchronized across countries, or systemic intermediaries canevade policy actions taken by national authorities.

The need to coordinate macroprudential and monetary policiespresents a greater challenge for international coordination. Interna-tional coordination is more vital and more complex than expected—and less understood.73 A policy response that integrates macropruden-tial and monetary approaches introduces more discretion and judgmentto a level above rules-based systems, with a greater demand on interna-tional coordination. While international lawyers and political scientistshave long analyzed coordination, for economists, the area and the toolsof economic diplomacy remain in an infant state. Much less attention ispaid to the cross-border role of monetary policy in macroprudentialregulation or the international coordination of relevant policies, de-spite the vivid lessons from spillovers and imbalances during the Crisis.

This Part examines the case for international coordination of mon-

MONETARY FUND, RECENT EXPERIENCES IN MANAGING CAPTIAL INFLOWS—CROSS-CUTTING THEMES AND

POSSIBLE POLICY FRAMEWORK (2011); VIVEK ARORA ET AL., INT’L MONETARY FUND, THE LIBERALIZATION

AND MANAGEMENT OF CAPITAL FLOWS: AN INSTITUTIONAL VIEW (2012). See BLANCHARD, supra note 12,at 10.

69. Jan Strupczewski, European Central Bank’s Joerge Asmussen: G20 Losing Steam As Crisis Abates,REUTERS (2013).

70. See GLOBAL FINANCIAL STABILITY REPORT, supra note 35.71. Ramon Moreno, Bank for Int’l Settlements, Monetary Policy Transmission and the Long-term

Interest Rate in Emerging Markets (Working Papers No. 35, 2008).72. Nicola Cetorelli & Linda S. Goldberg, Banking Globalization and Monetary Transmission,

67 J. FIN. 1811 (2012); Hyun Song Shin, Global Banking Glut and Loan Risk Premium, IMF 12th

Jacques Polak Annual Research Conference (2011).73. CHRIS BRUMMER, MINILATERALISM: HOW TRADE ALLIANCES, SOFT LAW AND FINANCIAL ENGINEER-

ING ARE REDEFINING ECONOMIC STATECRAFT 188 (2014).


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etary and macroprudential policy. It asks, first, why economic coordina-tion is rare and why that condition is suboptimal. Second, it identifiessome specific issues of friction in macroprudential and monetarycoordination. Third, it reviews approaches to promote coordination inthese areas.

A. Insufficient International Coordination

Despite the need, there are few prominent cases of internationalmonetary and financial policy coordination. The 1973 SmithsonianAgreement and even the 1985 Plaza Agreement and 1987 LouvreAccord were driven by hegemonic U.S. action surrounding currencies,as arguably was the international response to the Asian crisis.74 Multi-lateral trade agreements engage in a different dynamic perhaps be-cause they are driven by seeking economic opportunities rather thanrepairing economic damage. The few successful examples occurredduring worldwide crises. These include the coordinated drop in inter-est rates by central banks in 2008 and the Federal Reserve’s currencyswaps facility during the Crisis.75

Some contend that international coordination occurs spontaneouslyduring crises and is not worth the trouble when economies are onbalanced growth paths, but may yield worthwhile gains during condi-tions in between.76 Although that assertion is little developed, formalinquiry into the underlying interests and forces would be helpful. Tosuggest that cooperation flourishes only under a threat sufficientlygreat to overwhelm national self-interest misses two lessons of theCrisis. First, systemic risks can build during economically benign peri-ods, so coordination is valuable even in calm periods to pre-empt crises.In fact, it is prudent to deepen coordination when it seems easy.Second, the crux of coordination is the alignment of interests, andsuch knowledge should direct countercyclical management regardlessof the degree of distortions and instability rather than rely, or not, onad hoc spontaneous coordination in crises.

Spontaneous coordination may occur in a global crisis because

74. Mark T. Berger, Bringing History Back In: The Making and Unmaking of the East Asian Miracle,INT’L POL. & SOC’Y (1999).

75. Press Release, Bd. of Governors of the Fed. Reserve Sys., Joint Statement by the CentralBanks (Oct. 8 2008), available at http://www.federalreserve.gov/newsevents/press/monetary/20081008a.htm; Bd. of Governors of the Fed. Reserve Sys., Regulatory Reform, Central BankLiquidity Swap Lines, available at http://www.federalreserve.gov/newsevents/reform_swaplines.htm.

76. JONATHAN D. OSTRY & ATISH R. GHOSH, INT’L MONETARY FUND, OBSTACLES TO INTERNA-TIONAL POLICY COORDINATION, AND HOW TO OVERCOME THEM (2013).


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countries may face similar circumstances that overwhelm other indi-vidual country conditions, and so many nations’ interests align inseeking action. In benign times of steady-state economic performance,national interests reflect differing cyclical positions and endowmentsthat appear to outweigh systemic stresses and theoretical arguments.But even in crises, policy in practice may be national even as therhetoric reflects a multilateral perspective. A poignant recent exampleis when leaders at the November 2008 G20 summit jointly committedtheir nations to continued free trade but individually enacted 1,527trade barriers in the following five years.77

In short, there is little empirical knowledge of macroeconomiccoordination for specific financial stability purposes. Cases of successachieved outside the public view, failed attempts, or ignored opportuni-ties have not been described, nor have the consequences been quanti-fied, or otherwise studied. There appears little insight, though growingresearch interest, in what succeeds and how, nor in the preconditionsfor success. It would seem that the helpful distinction is not betweencrisis or economic normality but the extent to which countries sharedistortions and the degree of complexity in the solutions. After all,when economies are on balanced growth paths and the benefits fromcoordination are small so are the impediments. Especially in times ofneither crisis nor normality, but of anxiety over macroeconomic imbal-ances, the gains from coordination depend on the alignment of risks,distortions and interests, among other factors.

Coordination should be desirable when it enables countries toimprove their policy tradeoffs. While gains from coordinating macro-prudential policy, much less interactive monetary-macroprudentialpolicy, have not been estimated, economists have analyzed welfaregains from other types of coordination, notably CFM.78 The generalview is that the gains from coordination are not large, but similar tothose from global trade liberalization.79 These trade estimates varywidely, but the most recent improved modeling reveals gains of about

77. Simon Evenett, What Restraint? Five Years of G20 Pledges on Trade, Global Trade Alert 14th

Report 61 (2013). The WTO reports semi-annually on trade measures, including new restrictionsregularly on trade restriction’s count differs slightly for technical reasons. See, e.g., WTO OMC,REPORT ON G20 TRADE MEASURES (2013), available at http://www.wto.org/english/news_e/news13_e/g20_wto_report_dec13_e.pdf.

78. JONATHAN OSTRY ET AL., INT’L MONETARY FUND, MULTILATERAL ASPECTS OF MANAGING THE

CAPITAL ACCOUNT (2012).79. ZHENG LIU & EVI PAPPA, EUR. CENTRAL BANK, GAINS FROM INTERNATIONAL POLICY COORDINA-

TION: DOES IT PAY TO BE DIFFERENT? (2005).


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0.5 percent of GDP.80 The gains were thought larger in the past, and acase could be made that the economic rewards from trade are shiftingto finance. More recently, economists are finding larger gains frominternational coordination in the monetary policy environment of thepast decade than were previously found to be compared to emphasiz-ing domestic policy.81 Where an important analysis found “the gainsfrom coordination . . . appear modest . . . the utility equivalent of one-half percentage point of GNP in each of the next few years of a morecoordinated expansion,”82 subsequent correction of the study’s cross-border multipliers doubles the estimated gains from coordination.83

Even if the perceived benefits of coordination seem minor comparedto the political and practical obstacles, there is an additional benefit topolicymakers. In the post-Crisis economic environment of high debt,zero lower bound interest rates, evolving theory, and little politicalclarity, international coordination of policy strategies offers an addi-tional dimension for economic management.84 Coordination can yieldgains that are worth seeking.

The impediments to greater policy coordination are many. Theproximate one is sheer national self-interest, as distinguished fromenlightened self-interest, and fear of a miscalculation in negotiating.IMF researchers have found that the most compelling reasons areasymmetries in country size, disagreement about the economic diagno-ses and cross-border effects of the remedies, and policymakers’ failureto make tradeoffs across various objectives.85 Chris Brummer hasdetermined that a fundamental cause of the difficulty is an inability toaccurately assess unknown costs and benefits of policy choices when the

80. Separate from gains in steady state environments, there are crisis-time losses to beavoided. Average costs of crises are estimated to be as high as fifteen percent of global GDP.W. PHILIP DAVIS, MACROPRUDENTIAL ANALYSIS AND FINANCIAL SOUNDNESS INDICATORS (2002). Therecent crisis is thought to be much costlier.

81. John B. Taylor, International Monetary Coordination and the Great Deviation, J. POL’YMODELLING (2013); Bank for Int’l Settlements, International Monetary Policy Coordination: Past,Present and Future (Working Papers No. 437, 2013); Jaromir Benes et al., Int’l Monetary Fund, TheBenefits of International Policy Coordination Revisited (Working Paper No. 13/262, 2013) (showinglarger stimulus and spillover effects from coordinated fiscal and macroprudential policy).

82. Gilles Oudiz & Jeffrey Sachs, Macroeconomic Policy Coordination Among Industrial Economies,BROOKINGS PAPERS ON ECONOMIC ACTIVITY, 1-75 (1984).

83. ATISH GHOSH & P. MASSON, INT’L MONETARY FUND, INTERNATIONAL POLICY COORDINATION IN

A WORLD WITH MODEL UNCERTAINTY 230-58 (1988).84. Olivier Blanchard et al., International Policy Coordination: The Loch Ness Monster, IMFDIRECT—

THE IMF BLOG (Dec. 15, 2013), http://blog-imfdirect.imf.org/2013/12/15/international-policy-coordination-the-loch-ness-monster/.

85. See OSTRY & GHOSH, supra note 76.


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usually complex situation is changing and offers uncertainty, a condi-tion receiving more attention from analysts.86

Jonathan Ostry and Atish Ghosh illustrate coordination where twocountries use monetary easing to close output gaps.87 This can boostinflationary expectations or asset prices, raising financial stabilityrisks. Three spillovers can result: greater exports, exchange rate ap-preciation, and suppression of foreign output. If the last effect domi-nates and policymakers do not cooperate on this distortion, theywill tend to stimulate more, to excess. But when the two countriescoordinate, they internalize this spillover and stimulate less. While theoutput gap remains larger, the benefit in lower risk of financial stabilitymore than compensates. And to the extent that excessive globalliquidity was destabilizing in third countries, they may benefit. Eachcountry is better off under coordination, but the arrangement is fragilebecause the country that cheats, by stimulating more than agreed, canraise its own output. Without enforcement or ostracism, coordinationfails.

For economic coordination in general, the impediments appear tooutweigh the potential gains. But for financial policy coordinationspecifically, the potential may be stronger. Issues presenting frictionshow promise for coordination.

B. Cross-Border Financial Frictions

Financial integration poses a range of specific challenges to theeffectiveness of national macroprudential policies and monetarypolicies. To illustrate, the following arise from asymmetric policyaction, where a country’s stance, whether prudent, imprudent, ormismatched, imposes costs on other countries in the absence ofcoordination:

1) A country’s macroprudential neglect or ineffectiveness canpermit the build-up of systemic risk and lead to crises. Withglobal linkages, a financial crisis anywhere can impose financialand trade distortions across borders and regions.

2) A country’s effective macroprudential policies to subdue arapid build-up of credit risks can shift provision of credit acrossborders—directly, by foreign bank branches, or by a combina-

86. See BRUMMER, supra note 73.87. See OSTRY & GHOSH supra note 76, at 8.


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tion. This “leakage” problem88 complicates the effectiveness ofmacroprudential policies. The solution to cross-border arbi-trage requires reciprocal coordinated policy action to achieveuniversal constraints on all relevant credit exposures. A coun-try’s macroprudential measures aimed to make its systemicallyimportant institutions more resilient can induce the financingto move elsewhere. Countries are apprehensive about losingthe institutions and their contribution to the economy, andthey are inclined to compete with lighter regulation and inviteregulatory arbitrary. Regulatory inaction can permit cross-border distortions when financial institutions’ foreign affiliatesare systemic but the parent institution is not supervised assystemic. Not only does this complicate the risk assessment butit can also generate cross-border conflicts. Macroprudentialmeasures intended to constrain systemic risk of foreign opera-tions can impose costs and efficiency losses on the parent inanother country.89

3) Measures pursued for financial stability and output gap pur-poses can cause significant spillovers. A lowered interest rate inone country can send capital into another, leading to multipledistortions. Excess credit can depress interest rates, causingasset price bubbles, inflation, exchange rate appreciation, andloss of exports. One set of stresses occurs when the UMP isbeing implemented, and another different set occurs when theUMP is being unwound. The effects of U.S. UMP on Brazilprovide a current example, where low interest rates and otherexpansionist policies in the United States and other advancedeconomies have created a glut of global liquidity, which in turnhas the unintended effect of damaging growth in poorercountries such as Brazil, called “currency wars.”90

4) Capital flows demonstrate the heightened need for interna-tional coordination of monetary and macroprudential policies,

88. SHEKHAR AIYAR ET AL., DOES MACROPRUDENTIAL LEAK? EVIDENCE FROM A U.K. POLICY

EXPERIMENT (2012).89. JOSE VINALS ET AL., INT’L MONETARY FUND, CREATING A SAFER FINANCIAL SYSTEM: WILL THE

VOLCKER, VICKERS, AND LIIKANEN STRUCTURAL MEASURES HELP? (2013).90. Int’l Ctr. for Trade and Sustainable Dev., Brazil Pushes Forward with Currency Discussion at

WTO, 15 BRIDGES 32 (2011); Allen Beatty & Joe Leahy, Brazil Blames Fed Move on Fiscal Inaction,FIN. TIMES (Sept. 22, 2011), http://www.ft.com/intl/cms/s/0/69f2c362-e538-11e0-852e-00144feabdc0.html; Brian Winter & Caren Bohan, Brazil Complains to Obama About Monetary Policy,REUTERS (Apr. 9, 2011), http://www.reuters.com/article/2012/04/10/us-brazil-usa-rousseff-idUSBRE8380O020120410.


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not only for systemic risks broadly but also for exchange ratemanagement specifically. Capital flows and the attendant fi-nancial risk can defy monetary policy remedies alone in manycases where surges have been difficult to manage. Raisinginterest rates to subdue overheating may attract more capitalinflows and deepen the financial instability, as well as distortsectors that require no intervention. Recently, several emerg-ing market economies have used macroprudential tools coun-tercyclically to handle swings in capital flows.91 Countries alsouse CFMs to restrict flows for financial stability purposes, andmacroprudential tools to deal with financial stability risks aris-ing from capital inflows and exchange rate shocks.92 Thesuccess in relieving distortions will depend on the coordinatedand coherent use of these different policy tools.

5) Exchange rates externalities also show the greater need forpolicy coordination.93 In open and financially-integrated econo-mies, monetary policy has less influence on long-term interestrates and asset prices, and exchange rate effects become moreimportant. Before the Crisis, foreign exchange lending tohouseholds in Eastern Europe increased as monetary policytightened.94 Falling interest rates in the downturn led to ex-change rate depreciation and unfortunate effects.

The illustrative cross-border frictions involving interactive monetaryand macroprudential policies demonstrate the advantages of havingcoordination between nations. This requires an institutional presence—whether an agency, treaty, technical process, or all these and others.

C. Institutional and Framework Approaches

The widening interest in integrated macroprudential and monetarypolicies brings attention to the legal and institutional frameworks forcoordination. Institutional constraints may impede the optimal deploy-ment of macroprudential instruments—for instance, where necessarycoordination with microprudential supervisory agencies is legally orinstitutionally difficult. Most of the research on institutional arrange-

91. See LIM ET AL., supra note 6.92. INT’L MONETARY FUND, THE LIBERALIZATION AND MANAGEMENT OF CAPITAL FLOWS: AN

INSTITUTIONAL VIEW (2012). See Zhang, supra note 40.93. Russell Kincaid & Max Watson, International Policy Coordination: Macroprudential Policies

and the ‘New Normal’ (St. Antony’s College Political Economy of Financial Markets DiscussionDraft, 2014).

94. See DELL’ARRICIA, supra note 25.


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ments since the Crisis has focused on internal national domesticinstitutional arrangements for coordinating macroprudential and mon-etary policies and on central bank independence.95 The literaturepresents models and surveys of various country institutional arrange-ments and coordination, considering the responsibilities of regulatorysupervisors and monetary authorities. It is unsurprising that to thispoint the focus is national rather than international, as it reflects thepriority of national economic recovery, the infancy of this topic, andthe complexity of international coordination. The growing work oncoordinating these policies on the national level contributes a usefultemplate on which to build an international framework. Salient fea-tures include professional body standards, discretion embodied inrules, independent expert oversight. These soft law concepts, as used ininternational financial diplomacy, illustrate minilateralism, the address-ing of a policy issue with the smallest number of participants needed toachieve the desired result.96 Institutions using minilateralist ap-proaches can assuage the identified obstacles to coordination, in-cluding lack of information about consequences of the decision,compliance, and country asymmetry.97 Institutional arrangements forcoordination can pursue frameworks appearing in macroprudentialcooperation efforts.

The coordination among nations of interactive macroprudentialand monetary policies requires frameworks that deploy the full rangeof financial diplomatic devices. These span from formal rules to fullydiscretionary ones, as reflecting the needs of infinitely various eco-nomic conditions and changing optimal policy mixes. Several of theseapproaches applied to particular financial stability situations illustratethe salient framework features.

1. Structural Agreements

International agreements that embody standards constitute themost formal level of a framework. Whether or not they have the statusof actual treaties, such agreements should gain legitimacy through aninclusive process of negotiation similar to multilateral trade agree-

95. JAN BROCKMEIJER ET AL., INT’L MONETARY FUND, MACROPRUDENTIAL POLICY: AN ORGANIZING

FRAMEWORK (2011). See BROCKMEIJER ET AL., supra note 52, at 27-30; BAYOUMI, supra note 36; ANTIPA &MATHERON PAMFILI, supra note 50, at 229.

96. See BRUMMER, supra note 73.97. See supra Part III.B.


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ments. The Basel Committee’s work is an example.98 Although itsproximate purpose is the determination of macroprudential standards,its work necessarily considers the interaction of all policy areas bearingon financial stability.

The issue of the resilience of systemic institutions99 can be largelyaddressed by multilateral agreements to impose capital surcharges onglobal systemically important financial institutions. The agreementsare supplemented by guidance that reflects some discretion for na-tional authorities to assess capital surcharges for domestic systemicallyimportant banks to seek some international consistency of approach.

2. Principles

Broad principles aimed to achieve financial stability provide morediscretion for national authorities, while establishing internationalnorms for the conduct of economic policy, both in action and in re-sponse. Thus, it provides standards for flexible rules of countercyclicalmanagement that derive from international agreements and standards.It also identifies for other countries areas and measures for manoeuver,and thus contributes to international coordination.

The issue of reciprocity100 illustrates a principle or standard ofbehavior that is embodied in the Basel III agreement.101 This provisionachieves coordinated imposition by countries facing potential insta-bility of more sector-targeted risk-weighted measures. It aims to avoidthe distortions from unilaterally-imposed capital controls for macro-prudential effectiveness that can cause retribution, distortions for allinvolved, and compounding loss of welfare. Basel III cooperationprovides a standard and model for international coordination ofmonetary policy to enhance macroprudential tools in this area.

3. Discretion for ad hoc Bilateral/regional Policy Coordination

Unilateral policies can be coordinated by international guidancethat provides a progressively greater degree of discretion for seekingoptimal policy mixes that consider cross-border effects. Guidance formanifold economic situations is issued that maintains considerable

98. See BRUMMER, supra note 73, at 99-102.99. See supra Part III.B.100. Id.101. BASEL COMMITTEE ON BANKING SUPERVISION, GUIDANCE FOR NATIONAL AUTHORITIES OPERAT-

ING THE COUNTERCYCLICAL CAPITAL BUFFER, Bank for International Settlements Communications 5(2010).


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space for national discretion in addressing instability risks. Principlesand standards may not adequately account for local conditions, so theyshould be augmented with assessments for rapid mitigation responsesto evolving systemic risk. The Basel Committee, for instance, urgedcountries to watch credit-to-GDP ratios and to respond appropri-ately.102 A country’s own assessment can be informed by multilateralsurveillance to instill awareness of the spillovers and costs imposed onother countries by policy choices. This framework feature enjoins tocoordinate their management of systemic risks.

Forms of bilateral and regional coordination and consultation maydiffer, ranging from supervisory colleges that can facilitate informationexchanges and awareness of welfare costs and interdependencies tobilateral agreements that coordinate macroprudential measures of thecountries involved. Coordination backed by institutions is vital forcountries in integrated regional financial systems, such as a singlemarket or currency union, for instance the ESRB, the Nordic-BalticMacroprudential Forum, and the more ad-hoc “Vienna initiative.”103

4. Global Expert Watch Assistance

Coordination can be deepened, from agreements to standards andguidance for unilateral action, through expert advice and surveillance.This approach would address a serious impediment to coordination,that is, how to provide for the coordination-inducing information oncosts and benefits of economic conditions and policy responses—howto alter national priorities. The IMF’s surveillance, Financial SectorAssessment Program (FSAP), and technical assistance helps countriesassess systemic risks and select appropriate policy mix responses. Morecould be done to create reciprocal considerations in coordination,such as cost-sharing, in order to improve the position of nationalauthorities facing opposition and encourage them to take difficultactions.

For destabilizing capital flows,104 source countries could act to raisethe cost and cut the volume of risky lending, and recipient countries

102. Id. at 10-17; Mathias Drehmann & Kostas Tsatsaronis, The Credit-to-GDP Gap andCountercyclical Capital Buffers: Questions and Answers, BIS Q. REV. (2014). See BROCKMEIJER, ET AL.,supra note 52, at 32.

103. See BROCKMEIJER ET AL., supra note 52; INT’L MONETARY FUND, MONETARY AND CAPITAL

MARKETS DEP’T, EUROPEAN UNION: MACROPRUDENTIAL OVERSIGHT AND THE ROLE OF THE ESRB,TECHNICAL NOTE (2013); Nier, supra note 49, at 37; VIENNA INITIATIVE, http://vienna-initiative.com(last visited June 18, 2014).

104. Supra Part III.B.


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could use integrated policies and even CFM tools. The global expertentity would go beyond its surveillance and advice to create a marketfor cost sharing. It would build on current analytical and empiricalresearch about financial instability to determine the costs of actions,similar to WTO dispute settlement panels. Coordination would bevoluntary, but the choices and responses of countries would be transpar-ent to the community of nations. This activity presently occurs on aninformal ad hoc basis without the awareness of all countries. It may leadto the formation of more effective coordination frameworks, such asthe 2012 agreement on the resolution of systemically important finan-cial institutions between the U.S. FDIC and the Bank of England.105

These current elements of a coordination framework cannot remedythe missing requirement that countries consider the impacts of theiractions on financial stability beyond their borders. However, multi-lateral institutions can pursue frameworks that align national interestsand create incentives for coordination.

The case for coordination of monetary and macroprudential policyis compelling, and the emerging approaches offer potential. Theaccepted pessimistic view of the scope for achievable gains, thoughsupporting the goal, reflects scant analysis of nascent minilateralist andsoft law approaches.106 Part IV examines what is known about coordina-tion by the major multilateral monetary policy institution.

IV. THE CHALLENGE TO INTERNATIONAL INSTITUTIONS

The case for multilateral coordination of interactive countercyclicalpolicies in a financially integrated world is clear. The Crisis itselfgenerated a burst of multilateral coordination. The G20 heads of stateagreed on mutual policies and directed plans and monitoring ofeconomic progress.107 The Financial Stability Forum was transformedinto the FSB. The IMF was enhanced in lending capacity and with newprograms to assist stability of member countries. The U.S. FederalReserve gathered many major central banks in a program of currencyswaps, after they had coordinated the 2008 drop in interest rates.108

Basel III undertook the creation of macroprudential rules. Serious

105. FEDERAL DEPOSIT INSURANCE CORPORATION & BANK OF ENGLAND, RESOLVING GLOBALLY-ACTIVE, SYSTEMICALLY IMPORTANT, FINANCIAL INSTITUTIONS (2012).

106. STIJN CLAESSENS, INTERACTIONS BETWEEN MONETARY AND MACROPRUDENTIAL POLICIES IN AN

INTERCONNECTED WORLD 21 (2013).107. FINANCIAL STABILITY BOARD, INT’L MONETARY FUND & BANK FOR INT’L SETTLEMENTS,

MACROPRUDENTIAL POLICY TOOLS AND FRAMEWORKS, PROGRESS REPORT TO G20 (Feb. 2011).108. See Federal Res., supra note 75.


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consideration attended discussion of new global governance architec-ture. The main question in Part IV is how can efforts now and in therecent past be evaluated with a view to informing how to go forwardwith international coordination.

An obvious answer considers the current institutional propellersof economic coordination. This topic goes beyond economic policyproper, and examines the broad areas of international governance,financial diplomacy, and the new subject of minilateralism. The issueis how to assess future courses, and how to enable currently well-positioned institutions to more effectively coordinate policy in thepost-Crisis world. This Part first reviews the stated and practiced mis-sion of the IMF—to develop and provide expert advice to membercountries. Second, it questions the IMF’s record of influence, stymiedby a lack of hard evidence. Third, it discusses ways in which the Fundcan increase its effectiveness in economic diplomacy by implementingnew approaches to multilateral coordination of macroprudential-monetary policy or demonstrating with its professional rigor the empiri-cal objections.

A. Look to the IMF

Fortunately, there are international financial institutions that mightprovide this function. Several articulate the need, demonstrate engage-ment with the issues, and appear willing to contribute to the role—inthe manner to which it is accustomed. Among the familiar acronyms,the IMF arguably has the firmest claim to be the leader in internationalfinancial coordination, a standing well-acknowledged by scholars.109

Numerous Fund documents repeat its claims for authority, citing

its mandate to promote the effective operation of the interna-tional monetary system; its near universal membership; a breadthof expertise that spans macroeconomic and financial stabilityanalysis; and a focus on analyzing members’ domestic policymix and policy coordination across countries . . . thereby ensur-ing that macroprudential policy can contribute effectively todomestic macroeconomic stability, and that national macro-prudential policies ‘add up’ to contribute to global financialstability.110

109. BRUMMER, supra note 73, at 50.110. See BROCKMEIJER ET AL., supra note 52, at 37.


2014] 1123

Others observe that the IMF maintains some distance from the financeindustry, unlike the Bank for International Settlements and FSB,although that may be changing as the Fund grows its capital marketsexpertise and provides a revolving door for nascent central bankers.The Fund calls its qualifying position “unique.”111

A large body of literature and gatherings of close observers analyzethe methods used and the challenges faced by the IMF along withproposals for its change. The grandest of these usually require somedetectable transfer of power among member nations for vague gains,thus precluding universal support. Macroprudential-monetary policiesmay well be difficult to coordinate in practice, and achievable gainseven more elusive than models imply. However, the Crisis experienceof lost output and employment in most every nation, and the modestyof its intrusion into national macroprudential policy, could make thisarea of coordination more likely than other significant tasks, notablycurrency misalignments. Some observers question the value-added ofthe Fund, for instance in the Euro crisis.112 An inevitable question ishow effective is the IMF likely to be?

Since the 1973 demise of the more rules-based Bretton Woodsregime for exchange rates, the IMF has influenced members’ eco-nomic policies though persuasion based in expert analysis. Its surveil-lance undergirds a model of financial diplomacy based in consensusdecisions and discrete influence rather than enforcement of policyprescriptions. A deferential policy of “evenhandedness” prevails, anddoes not force collective action. A recent example of the Fund’scompliance with prevailing trends comes from macroprudential policyitself, a subject pursued with enthusiasm by a newly revived Fund made“relevant” by the Crisis.113

The IMF undertook for the G20 the mutual assessment of policies(MAP), under which members’ policy frameworks were analyzed bypeers with the IMF as a secretariat. While it is too soon for a conclusion,it appears that no large countries have significantly adjusted theireconomic policies in response to MAP peer pressure.114 The urgencyfor collective action diminished with distance from the Crisis, and as

111. See id.112. See Susan Schadler, The IMF and the Legacy of the Euro Crisis, VOX (Oct. 15, 2013),

www.voxeu.org/article/imf-failings-ex-crisis.113. Nancy Marshall-Genzer, IMF Returns to Center Stage, MARKETPLACE (Nov. 5, 2011),

http://www.marketplace.org/topics/world/imf-returns-center-stage.114. Hamid Faruqee & Krishna Srinivasan, The G20 Mutual Assessment Process—A Perspective

from IMF Staff, 28 OXFORD REV. ECON. POL’Y No. 3, 493-511 (2012).


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countries’ political-economy priorities changed. The MAP’s shiftingfocus away from macro policies toward structural reforms avoids po-litical resistance and embraces a lighter touch. The MAP is likely tosucceed more than the IMF’s previous “multilateral consultation”initiative, but the lack of an effective broker to help identify mutuallybeneficial policy trades contributed to the MAP’s failure to fulfill itspromise.

A preliminary examination of the IMF’s experience with multilateralcoordination of policy informs its potential success in coordinatingmacroprudential-monetary policies. Its model of financial diplomacy,based in persuading with expert economic advice, offers little quantita-tive evidence, which the Fund can remedy. Ultimately, of course, theIMF may not overcome the present impediment that national authori-ties often do not have incentives or even a legal mandate to take fullaccount of the effects of their actions on financial stability in othercountries. However, the IMF can improve its effectiveness. Robustanalytics and global purview—rather than prosecutorial culture—isno doubt an IMF strength. The IMF does not want to be an enforceror a global regulator, even for monetary policy alone. The IMF’s wayis persuasion and building consensus, instilling cooperation, leadingsolutions in policy, and practicing financial diplomacy.

In any case, the IMF has taken up the job of promoting economicstability. It has broadened its analysis of macrofinancial risks beyond itstraditional surveillance and technical assistance to the effects of mem-ber countries’ economic and financial policies on their own stabilityand on global stability. It has mandated the previously voluntary FSAPand created new multilateral surveillance and reports, including theIntegrated Surveillance Report (ISD), Spillover Report, and ExternalSector Report.115 The IMF conducts research into macroprudentialtopics, from toolkits and cookbooks to models of policy interactionsand thought leadership with the other agencies in this area.116 Fundstaff evaluates and discusses with countries spillovers and alternativepolicy options to minimize adverse impacts. The goals are to “enhancethe complementarity between monetary, macroprudential and micro-prudential policies; to identify policy tools to minimize negative sideeffects, and to consider the cross-border effects of policies in differentjurisdictions.”117 In its words, “the Fund should play a key role in

115. See BROCKMEIJER ET AL., supra note 52, at 37-38.116. Id. at 37.117. Id.


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contributing to the development of macroprudential frameworks, incollaboration with standard setters and country authorities . . . to fa-cilitate its dialogue with national authorities on macroprudentialpolicy.118 Similarly, the goals of the IMF are to “strengthen the in-stitutional underpinnings for macroprudential policy; help analyzeevolving risks, policy linkages, and spillovers; and advise on the policyresponse appropriate for each country” but it should “take a cautiousapproach, building up in-house expertise and conducting furtherresearch . . . .”119

The Fund is in a unique position, through its existing programs ofsurveillance, FSAPs, and technical assistance, to help countries conductan in-depth assessment of systemic risks, and to advise on preventivemacroprudential action in the light of this assessment. Such surveil-lance can strengthen the hands of national macroprudential authori-ties in the face of opposition and increase their resolve to take poten-tially unpopular risk-mitigating action.

B. IMF Record

Quantitative evidence of the IMF’s effectiveness in policy coordina-tion is difficult to obtain. IMF public documents offer no real, quantita-tive evidence of effectiveness, and officials express a desire for data andeven suggestions, such as using the new mandated FSAP regime forassessing “traction” of the impact of IMF advice. One report generateddata by asking staff members to estimate the traction of Article IVadvice.120 This effort found that IMF advice was followed twenty per-cent of the time, and was agreed to by countries with a slower pace forimplementation twelve percent of the time. It also confirmed thatadvanced economies tend not to follow IMF advice while borrowingcountries do.121 Overall, the attempts to generate quantitative evidenceare disappointing in effort and impressions.

Executive Board Members, including the author of this Article, attestthat IMF management may privately cite anecdotal accomplishments in

118. Id.119. Press Release, Int’l Monetary Fund, IMF Executive Board Discusses Key Aspects of

Macroprudential Policy (2013), available at http://www.imf.org/external/np/sec/pr/2013/pr13342.htm.

120. INT’L MONETARY FUND, ONE YEAR AFTER THE 2011 TRIENNIAL SURVEILLANCE REVIEW—PROGRESS REPORT, 17 (Nov. 2012).

121. Id.


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building consensus, typical of diplomacy, or of giving persuasive advice.The management expects to be judged on its own terms, that of itsexpertise, and its role in dispassionately serving all its members—a validapproach if effective. The Executive Board periodically reviews its roleas “trusted advisor,” and the periodic reports rely on surveys of Membercountry officials’ opinions of the IMF and its service.122 For an organiza-tion of economists with an understanding of statistical endogeneity, theIMF nonetheless regards seriously the responses of people incentivizedto give pleasing answers.

Even still, that data typically is mixed. The survey evaluation ratingsgenerate reports expressing new determination to improve its activitiesand outreach to the Members countries.

Management reports describe the valid problem with quantitativeevidence. One could not count the disasters averted by IMF adviceor diplomacy, the result that must be attributed to the Member’sofficials for political reasons, and the unpopular disciplinary roleprovided by the IMF that must be hidden in the interest of politicalsense or market stability. This factor is intuitive and acknowledgedoutside IMF management.123

Thus, in the absence of information, evaluations by unofficial observ-ers usually revert to anecdotes and impressions. The IMF can bedisarmingly self-critical, at least in its Independent Evaluation Office(IEO).124 This unit famously asked why the IMF failed to anticipate theCrisis.125 And its critique appears to be well accepted by the IMF. Giventhe fact that the economics profession as a whole missed the Crisis, theinquiry and the proposed remedies portrayed the IMF as dedicated totruth and effectiveness. An inquiry more revealing, arguably, was intothe impression of the IMF’s ineffectiveness in reducing imbalances andcurrency manipulation by prominent members, resulting in lost cred-ibility for the IMF.126 The IEO in 2007 also said that “[t]here was a lack

122. INT’L MONETARY FUND, INDEPENDENT EVALUATION OFFICE, THE ROLE OF THE IMF AS

TRUSTED ADVISOR, INDEPENDENT EVALUATION OFFICE REPORT 30-31 (2013).123. INT’L MONETARY FUND, INDEPENDENT EVALUATION OFFICE, IMF INTERACTIONS WITH MEMBER

COUNTRIES (2009).124. INT’L MONETARY FUND, INDEPENDENT EVALUATION OFFICE, http://www.ieo-imf.org (last

visited June 18, 2014).125. INT’L MONETARY FUND, INDEPENDENT EVALUATION OFFICE, IMF PERFORMANCE IN THE

RUN-UP TO THE FINANCIAL AND ECONOMIC CRISIS: IMF SURVEILLANCE IN 2004-07 (2011).126. LAWRENCE DWIGHT ET AL., INT’L MONETARY FUND, 2011 TRIENNIAL SURVEILLANCE REVIEW—

STAFF BACKGROUND STUDIES 7-33 (2011); STEPHEN PICKFORD, INT’L MONETARY FUND, TSR EXTERNAL

STUDY—IMF SURVEILLANCE: COVERAGE, CONSISTENCY, AND COHERENCE 6 (2011).


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of effective engagement on exchange rate issues,”127 the historic andoriginal function of the IMF.

At the same time, in the 2007 report, fewer than half thought theIMF was getting the balance right in its roles as a broker for interna-tional policy coordination and ruthless truth teller to the internationalcommunity. The advanced economies particularly called on the IMF tobe more proactive, and forty percent of the staff thought the IMF couldplay a more active role in international policy coordination.128 In fact,the IMF’s inability to persuade China to revalue its currency in linewith its staff analysis—despite using various strategies not knownpublicly—reinforces a perennial widespread impression about theIMF’s ineffectiveness in financial diplomacy.129 It is a widespread viewthat the advanced economies ignore IMF advice, while needy countriesthat want to borrow from the IMF must follow it.130 Like many carica-tures, this one is based in facts. Financially troubled borrowers justlyhave remedial policy changes, “conditionality,” attached as terms to theloan. Often these are politically unpopular, as are the IMF austeritymeasures in Greece, and the IMF is widely seen to require compliance.Meanwhile in the United States, the IMF is hardly known apart fromeconomists or sovereign bond traders, even in Congress, and its adviceon national economic policy (as distinct from its evaluations of bor-rower countries) is disregarded. Nobel laureate economist JosephStiglitz reports that as President Clinton’s chief economist, IMF advicehad no impact, despite unfounded fears that it might influence others’thinking.131

Effectiveness, formerly “relevance” until the Crisis, is understandablya major concern for the IMF. It conducts numerous regular discussionson the impact of its advice, the traction. The IMF’s Triennial Surveil-lance Reviews (TSR) engage a group of external advisors as well as

127. Camilla Andersen, IEO Questions IMF Exchange Rate Advice, IMF SURVEY ONLINE (May 17,2007), http://www.imf.org/external/pubs/ft/survey/so/2007/POL0517A.htm (last visitedJune 18, 2014).

128. INT’L MONETARY FUND, INDEPENDENT EVALUATION OFFICE, IMF EXCHANGE RATE POLICY

ADVICE (2007).129. DWIGHT ET AL., supra note 126, at 7-29.130. Irwin M. Stelzer, What’s the IMF’s Point? THE WEEKLY STANDARD BLOG (Apr. 20, 2013,

12:00 AM), http://test.weeklystandard.com/blogs/what-s-imf-s-point_718124.html.131. JOSEPH E. STIGLITZ, INT’L MONETARY FUND, TSR EXTERNAL COMMENTARY—A SHORT NOTE

ON SURVEILLANCE AND HOW REFORMS IN SURVEILLANCE CAN HELP THE IMF PROMOTE GLOBAL

FINANCIAL STABILITY 1 (2011). Anecdotal evidence indicates that some U.S. government econo-mists read IMF research and recommendations.


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internal staff evaluation, and then generates follow up progress reportsuntil the next triennial.

The post-Crisis TSR effort devoted much attention to generatingtraction. It acknowledged the limitations of survey evidence of theIMF’s effectiveness, noting the imprecision of the term and objective,along with the failure to distinguish among cases where the IMF’sadvice was accepted or ignored when either easy or difficult. The TSRurged greater effort in this area, by digging deeper into results, havingperiodic ex post assessments of surveillance effectiveness, and by theperennial call to improve the quality of IMF advice. The TSR regrettedthat “those countries most important to global economic and financialstability (large countries) appear to pay the least attention to the IMF’sadvice.”132

C. New IMF Potential

The IMF is well positioned to provide effective international coordi-nation of economic policy for systemic financial stability. It has an arrayof minilateralist tools and techniques. First, since the demise of theBretton Woods system, the IMF has become a model for soft law. In factIMF moved from rules to soft law, an opposite direction from tradeunder the World Trade Organization. Of course, trade is not tied upwith cyclical behavior, so it needs release rather than constraint like thepro-cyclical finance activity requires. Also, trade laws regulate govern-ment behavior while financial regulations guide the private sector andindividuals. Second, the IMF engages in financial engineering that caninduce coordination of policy. As a crisis financier to the world, theIMF can encourage countries’ behavior. Third, the IMF can combineexpert technocratic work to address the unknowns that thwart interna-tional cooperation. Its surveillance can lower the costs of informationand transactions. The IMF monitors continuously rather than in an adhoc manner, and can apply reputational enforcement, transparencyand consensus, building on expertise and research for standards.These are minilateralist techniques and attributes. The test of theeffectiveness of the IMF as a soft law model is a test both of the IMF andof the model. Rigorous analysis of quantitative evidence through casestudies on what approaches have been tried under various conditionswould help to improve the soft law model, and the IMF should be ableto generate data for the analysis.

132. INT’L MONETARY FUND, 2011 TRIENNIAL SURVEILANCE REVIEW—REPORT OF THE EXTERNAL

ADVISORY GROUP, 6 (2011).


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The IMF followed up the 2011 TSR with efforts to improve tractionthat mainly involved improving its analytical coverage, regional perspec-tive, and evenhandedness. It also increased its efforts at public out-reach. These efforts occurred when the IMF was increasing its pro-grams and analysis in response to the Crisis, for instance by increasingFSAP coverage and adding macroprudential surveillance reports. Itsnew strategy for financial surveillance called again for improved trac-tion through more engagement and communication.133 A more recentTSR follow up factsheet drawing on “Lessons from the Financial Crisis”reports on the IMF’s improved analysis of global linkages in its surveil-lance products, especially noting how the 2012 Integrated SurveillanceDecision (ISD) “helps the IMF to engage members at an earlier stage inthe buildup of risks and vulnerabilities, and encourages them to bemindful of the impact of their policies on global stability.”134 Thesedescribe the potential for financial diplomacy in customary IMF lan-guage, but offer no insight into the IMF’s ability to coordinate policyactions when and where it matters to financial stability.

The IMF’s concern about lack of traction endures, as it aspires to agreater role in macroprudential policy. The planning paper and publicrequest for comments for the 2014 TSR notes “concerns about thetraction and evenhandedness of Fund surveillance . . . seem to havebecome more acute in the past few years.”135 It calls for improvementin the quality of analysis and advice, and for more surveys and inter-views.136 There is no explicit plan to generate quantitative evidence orto “dig deeper” in a new way.

The IEO has tried to develop hard evidence of the IMF’s effective-ness. It reviewed myriad documents and IMF resource incidence forforty-nine sample countries in 2001-2008 to assess the quality of theinteraction between IMF staff and country authorities. It inquired intothe quality of the advice and relationship but did not evaluate the IMF’simpact on Member country policy measures.137 More could be donewith IMF’s knowledge of country policy responses. The IMF produces

133. Int’l Monetary Fund, IMF Sets Out a Strategy for Financial Surveillance, 1-5 (PublicInformation Notice No.12/111, 2012).

134. Int’l Monetary Fund, Strengthening Surveillance—Lessons from the Financial Crisis, IMFFACTSHEET (2013).

135. INT’L MONETARY FUND, 2014 TRIENNIAL SURVEILLANCE REVIEW: CONCEPT NOTE 5 (2013);INT’L MONETARY FUND, CONSULTATION ON THE IMF’S 2014 TRIENNIAL SURVEILLANCE REVIEW (2014).

136. INT’L MONETARY FUND, 2014 TRIENNIAL SURVEILLANCE REVIEW: CONCEPT NOTE 2 (2013).137. INT’L MONETARY FUND, INDEPENDENT EVALUATION OFFICE, IMF INTERACTIONS WITH MEMBER

COUNTRIES 155-57 (2009).


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detailed annual reports on the economic conditions, activities, policychoices, and prospects—including analysis into the theoretical dimen-sions—for nearly each of its member countries, apart from comprehen-sive FSAP reports on the financial sectors and other special papers. Itpossesses granular information on its advice and country decisions.According to this Author’s own experience, the staff routinely minesthe “Article IV” surveillance reports, the annual economic checkupof Member countries, for evidence of country experience used inExecutive Boardroom discussions and for analytic purposes other thanassessing the institution’s effectiveness. Ex ante and ex post countrypositions could easily be correlated with staff advice. Determiningcausality presents a real problem, but no more so than the endogeneity-based limitations of the IMF’s traction surveys of country officials. Thiscould be done for a period in the past to protect sensitivities, like therelease of confidential minutes of the U.S. Federal Reserve’s FederalOpen Market Committee, the group that sets interest rates. Withoutsettling definitively the issue of perfect evidence, much more quantita-tive insight could be sought if, for instance, evidence leans markedlyeither in support or in denial of the IMF’s effectiveness in this area. Thewidespread presumption from impressions, anecdotes, and IMF state-ments is that its financial diplomacy is less effective than desirable. TheIMF neither reports nor reflects any quantitative data on the success ofits advice and only very limited evidence of its acceptance by members.Hard evidence is unlikely to further harm the IMF’s reputation, espe-cially if it contributes to a more effective future.

The IMF earnestly pursues its model of financial diplomacy throughexpert analysis and tries to build consensus through trust rather thanenforcement. It is highly motivated to be effective since past multi-lateral failure to coordinate national economic priorities led to thecollapse of the Bretton Woods regime, though that was not specificallythe fault of the IMF. The IMF keeps working to improve its treatment ofmember nations, its communications to the public and financial mar-kets, provision of technical assistance to members, and coverage of newsocially-relevant topics like unemployment. Management explicitly re-jects a stronger role as “global watchdog” or “auditor,” preferring todevelop deeper relationships as a “confidant.”138 These roles might bereconciled without the tension feared by management, but throughsome new way to heed the calls of many to improve the “ability andwillingness of countries to heed IMF advise,” in the words of one IMF

138. INT’L MONETARY FUND, THE ROLE OF THE IMF AS TRUSTED ADVISOR 10-27 (2013).


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governor.139 The IMF’s likelihood of successful financial diplomacy,with or without modulating its preferred traditional approach, wouldbenefit from the insights generated by rigorous evaluation of its recordto date.

V. MINILATERALISM AND EFFECTIVE FINANCIAL DIPLOMACY

Progress in international economic governance waxes and wanes.The post-Crisis determination to avoid future financial turmoil—andserious consideration of new global governance architecture—abatedamong heads of state struggling to increase national economic growthand employment without drowning in debt. As the Crisis recedes andother issues displace the urgency of its lessons, the resolve to build onnational efforts and promote effective multilateral coordination forfinancial stability falls to professionals with understanding of the stakes.Yet the conduct of global monetary policy for macroprudential pur-poses is the subject of repeated calls for international coordination inthe media.140 These express the importance of the policy coordinationand the search for an institutional leader and approach. This Partbriefly mentions several of the prominent ones in a range fromreforming the IMF, both incrementally and radically, to establishingalternative institutions.

Several proposals since the Crisis, including the IMF’s, wouldstrengthen the expert advice financial diplomacy model. While thesetend to embody characteristics of minilateralism, a bolder minilateral-ist design along certain lines would likely improve financial diplomacyin the service of the financial stability goals of macroprudential policy.

The minilateralist literature suggests tools and approaches, includ-ing: conducting surveillance of impact potential and history; improvingtechnical approaches; taking small steps to change the IMF culturetoward enforcement and experimentation; applying the soft law num-bers game and financial engineering; using latent enforcement throughreputational leverage; and using quantitative evidence to start even if it

139. Guy Quaden, Governor of the National Bank of Belgium, Speech at the InternationalMonetary Fund Monetary Authority of Singapore Conference (Sept. 24, 2010).

140. E.g., William Rhodes, Major Central Banks Must Co-ordinate Policy, FIN. TIMES (Feb. 3,2014), http://www.ft.com/intl/cms/s/0/8006cfd2-8445-11e3-9903-00144feab7de.html#axzz33MIon4CW; Buiter, The Fed’s Bad Manners Risk Offending Foreigners, FIN. TIMES (Feb. 4, 2014),http://www.ft.com/cms/s/0/fbb09572-8d8d-11e3-9dbb-00144feab7de.html; David Wessel,Needed: Global Coordination, WALL ST. J. (Nov. 29, 2013), http://online.wsj.com/news/articles/SB20001424052702303332904579224233002226734.).


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reveals flaws.141 From these arise examples of additional minilateraliststrategies for the IMF. The IMF might join with the World Bank in anew role of promoting growth and employment among povertypopulations wherever they exist, to gain leverage in the advancedeconomies. The IMF could try undertaking country negotiations withvariable size groups within the IMF umbrella, as the Managing Directoroffice itself may be too small for effective strategy in some cases.Reforming the Executive Board in more ways than eliminating chairsmight help. Finally, enhancing surveillance, in more ways than thequality of research and modeling might be explored. These minilateral-ist suggestions, among many others, might have been tried by the IMF,but there is no useful evidence available for assessing utility.

Minilateralist proposals suitable for coordinating integrated macro-prudential-monetary policy are proliferating. This might well reflect anunarticulated view that traditional approaches are not likely to succeedthough the task is great and consequential. In contrast to ambitiousproposals for overall global governance or financial architecture, morerealist proposals would augment strengths of current institutions.These would build on the IMF’s presumed success with internationalstandards and codes—appropriate for monetary-macroprudential policycoordination—an effective use of incremental soft law. The proposalsillustrate the variety of approaches to international coordination:

1) The Palais Royale proposal would endow the IMF withpowers of multilateralist enforcement and dispute settle-ment.142 This rules-based approach builds on, but contrastswith the consensus-building advisory culture of the IMF. How-ever, the approaches can be designed to not necessarily con-flict. The threatened use of enforcement power could engen-der a spirit of voluntary cooperation if used appropriately.

2) Incremental changes are proposed in the processes of theIMF and other institutions. One version would strengthen thepreconditions for consensus and add various degrees of en-forcement pressure.143 Another approach, in the InternationalCenter for Monetary and Banking Studies (ICMB) GenevaReport, would direct the IMF’s diplomatic work on issuesthat are likely to yield successful multilateral coordina-

141. See generally BRUMMER, supra note 73 (both generally and for reference to the literature).142. MICHEL CAMDESSUS ET AL., PALAIS ROYAL INITIATIVE, REFORM OF THE INTERNATIONAL

MONETARY SYSTEM: A COOPERATIVE APPROACH FOR THE TWENTY FIRST CENTURY (2011).143. PETERSON INST. FOR INT’L ECON., STRENGTHENING IMF SURVEILLANCE: A COMPREHENSIVE

PROPOSAL (2010).


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tion, to the exclusion of others that might carry more im-pact.144 The modesty of the prescription contrasts with theanalysis of skepticism about the G20 process. The report encour-ages the IMF’s incremental enhancement of surveillance.145

3) Presumptive indicators could be used specifically for a regimeof macroprudential compliance. Because economic research isrevealing the behavior of variables under various economicconditions in the financial cycle and structure, thresholds forautomatic policy responses could be established. Countrieswould commit to comply unless a successful challenge wasmade to the presumption of the need to adjust policy.146

While not eliminating the presence of political factors, theproposal would be consensual, on the basis of expertise, andwith diminished arbitrariness. While previous prominent at-tempts to turn difficult political issues into sterile technicalones are less than inspiring, notably of exchange rate adjust-ments from the efforts of the C20 Group, attending the col-lapse of the Bretton Woods regime, to the present, monetary-macroprudential coordination presents very different dynamicsand conditions from exchange rates, and if undertaken effec-tively could be the spearhead for coordination in other areas.New legal obligations by amendments to the IMF’s Articleswould commit members to policies of financial stability andorderly growth without manipulating exchange rates or otherfeatures of the international monetary system. Such amend-ments could also empower the IMF to use surveillance morecomprehensively to thoroughly assess country frameworks,linkages, and spillovers. The effect would be to induce a widercommitment to cooperation, and expand IMF authorization tocoordinate policy.

4) IMF staff has suggested a neutral assessor147 as a way of induc-ing international policy coordination. This idea would get IMFcountries to agree to objective “guideposts” in currency manipu-lation and financial flows to reflect macroprudential risk points.The guideposts would be sufficiently flexible to appeal widelybut serve to provoke cooperation by expanding the transpar-

144. See generally FRIEDAN, supra note 9.145. See id. at xviii.146. CHARLES A.E. GOODHART, THE MACROPRUDENTIAL AUTHORITY: POWERS, SCOPE, AND AC-

COUNTABILITY, 2011 OECD J.: FIN. MARKET TRENDS, NO. 2 (2011).147. OSTRY & GHOSH, supra note 75, at 22.


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ency of country policy positions and degree of compliance.The IMF would act as a “superfirm,” suggesting solutions andcoordination. The issue of discretion is central to the strengthand limitations of this approach.

5) A new central banker group could coordinate monetary andmacroprudential policy globally. Proposed by the expert Com-mittee on International Economic Policy, this “internationalmonetary policy committee” would promote intensive andgranular cooperation by a relatively small assemblage of practi-tioners who actually implement the policies, a steering groupof central bankers. Objections have centered on the grantingof such thorough responsibility for the global economy toeither an often unaccountable group or to central bankers whohave lost their crucial independence from political influence.148

These proposals engage the rich discussion of the texture of law,hard or soft, of the application of rules versus discretion. This dilemmais especially applicable for macroprudential-monetary policy co-ordination. Calibrating policy effectively requires judgment, to find theoptimal policy mix with evolving risks. A static or rules-based systemfaces less political opposition compared to discretionary macro-prudential tools. However, to provide sufficiently strong defensesagainst a build-up of systemic risk, a static calibration may need to beinefficiently tight at all times, distorting financial activity and creatingincentives for circumvention.149 These are inherently minilateralistapproaches, and are best suited to coordination of monetary andmacroprudential policies. When integrated, monetary policy makesmacroprudential policy more discretionary, makes both of themmore discretionary and tilts policy formation more towards art thanscience.

VI. CONCLUSION

Just as military victory creates conditions that can distort the peaceand lead to further war, the Crisis is not ideal for the policymakingneeded to deal with crises. The danger of this paradox resides infocusing too narrowly on the tools that appear most directly relevant atthe time, to the exclusion of other influences. The lessons and focus

148. BARRY EICHENGREEN ET AL., COMM. ON INT’L ECON. POLICY AND REFORM, RETHINKING

CENTRAL BANKING (2011).149. Charles Goodhart, The Boundary Problem in Financial Regulation, 266 NAT’L INST. ECON.

REV. 1, 48-55 (2008).


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after a great crisis should not constrain broad inquiry. This time shouldbe different indeed.

This Article thus urges policymakers to integrate monetary analysiswith macroprudential policies before the opportunity and urgency ofthe Crisis abates further. Coordination of such integrated policy iscomplex, and the international coordination is more so and bearsimportant global consequences. Moreover, coordination of monetaryand macroprudential policy may offer opportunities for new mini-lateralist approaches that are elusive in dealing with the vexing prob-lem of currency misalignment.

The IMF may or may not be equipped to succeed at the task itwants to assume; but the financial diplomacy needed requires morecertainty of success than more of the same IMF approach apparentlyhas produced. Delineating an appropriate way forward would beginwith deeper analysis of the IMF’s record on traction. A minilateralistapproach as evidenced in several proposals would improve the like-lihood of successful international coordination of macroprudentialpolicy.


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international coordination of macroprudential and monetary policy

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