There is growing evidence that international financial spillovers have become a two-way street. They occur not only from the major advanced economies to the rest of the world, but also, and increasingly, from a group of large middle-income countries to advanced economies. Because financial markets are prone to amplification effects, and because business and financial cycles remain imperfectly synchronised across countries, this new environment creates the potential for shocks in one jurisdiction to be magnified and transmitted to others through short-term capital flows. In turn, these flows may exacerbate financial instability in both originating and recipient countries, thereby creating a case for international macroprudential policy coordination. The Bank for International settlement (BIS) focuses on measuring how large the gains from such coordination are likely to be.
The BIS contribution develops a model to assess the gains from international macroprudential policy coordination. Financial integration is imperfect and a global bank in the core region lends to banks in the periphery. The model is calibrated for two groups of countries, the major advanced economies and a group of large (systemically important) middle-income countries, which have been identified in recent studies as generating significant reverse spillovers (or spillbacks) to advanced economies.
The results show that the welfare gains from macroprudential policy coordination are positive, albeit not large, for the world economy. In addition, these gains tend to increase with the degree of international financial integration. However, depending on the origin of shocks, they can be asymmetric across regions. The fact that gains are not large and that coordination does not necessarily benefit all parties raises a general question about incentives for them to remain voluntarily in a cooperative agreement.