Central Bank of Ireland - RESTRICTED International Spillovers: Implications for Monetary and Macroprudential Policies Philip R. Lane, Central Bank of Ireland IBRN/JIMF: Global Financial Linkages and Monetary Policy Transmission Banque de France, 30 June 2017 Central Bank of Ireland - RESTRICTED

Outline Cross-Border Funding and Credit Growth: 2003-2008 International Spillovers: General Issues Monetary Policy and Macroprudential Policy: Current Perspectives Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

Cross-Border Funding and Credit Growth: 2003-2008 Lane and McQuade, “Domestic Credit Growth and International Capital Flows” (Scandinavian Journal of Economics 2014) Lane, “The Funding of the Irish Domestic Banking System During the Boom” (Statistical and Social Inquiry Society of Ireland 2015) Lane and Pels, “Current Account Imbalances in Europe,” (Moneda y Credito 2012) Lane, “Macro-Financial Stability under EMU” (Banco de Portugal 2015) Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

Credit Growth and Net Debt Flows, 2003-2008

International Spillovers: General Issues Shifting patterns in world GDP Shifting patterns in international financial linkages Net imbalances and transmission Time- and State- variation in transmission Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

Source: IMF WEO database, October 2016. Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

Source: ECB and Eurostat. Note: Emerging and developing economies correspond to Latin America, Africa, Turkey, and Asia ( excl. Japan). Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

Source: Eurostat. Central Bank of Ireland - RESTRICTED

Source: Eurostat. Central Bank of Ireland - RESTRICTED

Source: Lane and Milesi-Ferretti (2017, forthcoming). Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

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LMF (2017) Document evolution of cross-border financial claims and liabilities (“international financial integration”) since the global financial crisis Relate this evolution to the main macroeconomic and financial trends of the period Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

1. Documenting international financial integration: What is new Global dataset (212 economies), 1970-2015. Breakdown of debt instruments between portfolio debt and other investment. Special focus on financial centers, both “large” (e.g. United Kingdom; Netherlands) and “small” (Luxembourg; Cayman Islands). Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

Documenting international financial integration: Has it come to a halt? Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

Documenting international financial integration: The GDP picture Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

Documenting international financial integration: Why the slowdown? Much lower capital flows to and from advanced economies and financial centers Retrenchment in global banking Euro area crisis Increased weight of EMDEs in global GDP These economies have lower shares of external claims and liabilities to GDP, and hence lower the global share as they grow in importance Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

Documenting international financial integration: What has changed? Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

The retrenchment of global banking Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

Intra euro area claims Central Bank of Ireland - RESTRICTED

The portfolio of financial centers: from other investment…. Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

The portfolio of financial centers: ……to FDI Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

FDI in financial centers FDI largest component in financial centers’ external claims and liabilities Half of world’s FDI claims are booked by FCs Factors explaining rising FDI: Boom in special financial entities/special purpose vehicles Re-domiciling of MNCs to financial centers (e.g. Ireland). Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

FDI in financial centers—some figures Central Bank of Ireland - RESTRICTED

FDI in financial centers—some figures Central Bank of Ireland - RESTRICTED

Monetary Policy and Macroprudential Policy: Current Perspectives Analytical Issues Lessons from Recent Experience (2015-2017) Central Bank of Ireland - RESTRICTED Central Bank of Ireland - RESTRICTED

Analytical Issues I Internalisation of spillovers: monetary union global shocks (including commodity prices) versus local shocks Spillovers/Spillbacks among: Euro Area; US; Japan; China; ROW Spillovers to small open economies Spillovers to dollarised financial systems Spillovers to ‘currency trackers’  

Analytical Issues II Exchange rate channel; output channel Normal times: net spillover limited Financial channel (international role of dollar; impact of EM thirst for safe assets on yields in advanced economies; global factor in risk appetite / investor sentiment) Normal times: financial stability risks (macroprudential regulation) Lower Bound: constrains response to spillovers; limits strength of output channel; increases strength of exchange rate channel (?) Interaction of financial channel and balance sheet environment  

Lessons from Recent Experience International lessons in design of monetary policy (knowledge spillovers) Global growth forecasts critical: net exports; commodity prices Spillovers: investor sentiment; risk of large exchange rate movements Query: actual importance of exchange rate channel? Spillbacks: possibly relevant for US, given international role of dollar International cooperation: sharing of analytics and conjunctural assessments; clarity about policy feedback rules  

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