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IMF: Nations Need Dedicated Tools to Avoid Financial Crises

Monday, 16 Sep 2013 09:53 AM

The International Monetary Fund defined new policy guidelines for countries seeking to protect their financial systems and avoid a repeat of the global crisis, recommending that central banks be involved in the decision.

“The crisis has fostered a recognition that systemic risks can grow under the surface of apparent economic tranquility,” according to the report. “Financial stability need not therefore emerge as a natural by-product of an appropriate macroeconomic policy mix” and requires “dedicated macroprudential policies.”

While more and more countries use policies to lower the chances of financial bubbles or limit their impact when they burst, many are still figuring out what tools to choose and who has the mandate to do so, according to an IMF staff report released Monday, which the fund will use as a basis for its advice to countries.

The IMF has tried to update recommendations to its 188 member countries after it failed to see the signs of fragility that led to the 2008 financial crisis. In a shift last year, the Washington-based fund endorsed nations’ use of capital controls in certain circumstances.

The policies defined as macroprudential cover a broad range of measures, such as imposing a minimum down payment on home buyers or asking high rates when lending to a targeted sector.

The IMF recommended that the goal and scope of such measures be defined clearly and be complemented by monetary and fiscal measures. Countries should clearly define who has the power to decide these measures and who is accountable for them, according to the report.

“The central bank needs to play an important role, even if the precise arrangements are driven by the political economy and traditions,” the staff wrote in the paper.

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The International Monetary Fund defined new policy guidelines for countries seeking to protect their financial systems and avoid a repeat of the global crisis, recommending that central banks be involved in the decision.
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Monday, 16 Sep 2013 09:53 AM
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