This
paper analyzes the case for the international coordination of macroprudential
policies in the context of a simple theoretical framework. Both domestic
macroprudential policies and prudential capital controls have international
spillovers through their impact on capital flows. The uncoordinated use of
macroprudential policies may lead to a "capital war" that depresses
global interest rates. International coordination of macroprudential policies
is not warranted, however, unless there is unemployment in some countries.
There is scope for Pareto-improving international policy coordination when one
part of the world is in a liquidity trap while the rest of the world
accumulates reserves for prudential reasons.
Book: chapters 6 and 9
