Although the possibility of contagion through financial channels has long been recognised, macroeconomic models and analysis have typically relied more heavily on trade linkages as the key transmission channel of shocks across countries. However, during the crisis, the explosion in risk premiums and a changed pattern of capital flows transmitted the shock much more quickly to many economies.
The facility has been working well, but after five years it is time to make some modest and gradual adjustments to the settings, in a way that reduces the need of the banks to make use of the CLF while also increasing their cost of doing so a little.