Financial Spillovers, Spillbacks, and the Scope for International Macroprudential Policy Coordination

This paper discusses the scope for international macroprudential policy coordination in a financially integrated world economy. It first reviews the transmission channels associated with, and the empirical evidence on, financial spillovers and spillbacks - which have both increased in magnitude since the global financial crisis. Then it proceeds with evaluating the potential gains associated with cross-border macroprudential coordination, dwelling on both recent analytical contributions and quantitative studies based on multi-country models with financial market frictions. The particular case of currency unions is discussed, and so is the issue of whether coordination of macroprudential policies simultaneously requires some degree of monetary policy coordination. Much of this analysis focuses on the potential for countercyclical policy coordination between major advanced economies and a group identified as systemic middle-income countries (SMICs). Finally, the paper considers practical ways to promote international macroprudential policy coordination. Following a discussion of Basel III's principle of reciprocity and ways to improve it, the paper advocates a further strengthening of the current statistical, empirical and analytical work conducted by the Bank for International Settlements, the Financial Stability Board and the International Monetary Fund to evaluate and raise awareness of the gains from international coordination of macroprudential policies.