Emerging market in developing nations must develop tools to control credit flows or risk relinquishing any independent monetary policy, as they can be adversely affected by large swings in investment, a new study has found.
The study was presented at the Kansas City Federal Reserve's monetary policy symposium at Jackson Hole, which highlighted the global impact of the unconventional monetary policy of the United States and other major central banks.
According to Fox News, many countries including India and Brazil have recently suffered steep sell-offs in their currencies, linked in part to the prospect that the Fed might soon dial down the pace of its bond-buying monetary stimulus.
The Jackson Hole study highlights a shift in conventional economic thinking, which used to champion open flows of money between countries regardless of the consequences.
Helene Rey, professor at the London Business School, said that macroprudential policies are necessary to restore monetary policy independence for the nonÛÛÛcentral countries, the report said. Rey added that they can substitute for capital controls, although if they are not sufficient, capital controls must also be considered.
The paper said that that is because countries with floating exchange rates, the dominant global practice, would be abdicating their control over interests rates and credit creation from sources outside their control.