4  All speeches are available online at www.bankofengland.co.uk/speeches  4  Chart 5: The distribution of capital flows to emerging market economies Unconditional distribution  Probability density 0.10  Negative shock  0.08 0.06 0.04  A  B  0.02 0.00 -8  -6  -4  -2  0  2  4  6  8  10  12  14  16  18  Capital flows as a % of GDP  Sources: IMF and Bank of England staff calculations. Notes: This chart shows the unconditional distribution of capital flows to EMEs over 2006-2018, and an estimated distribution conditional on a one standard deviation negative shock to pull factors. The diamonds highlight the fifth percentile, which is our preferred measure of Capital Flows-at-Risk. We estimate several quantiles of the distribution through quantile regression and then fit a skewed-t distribution; hence, the distribution can both shift and change shape in response to shocks - see annex for further details. The grey line in Chart 5 shows the unconditional distribution of capital flows, and the purple line shows how the distribution shifts in response to a negative shock. “Capital Flows-at-Risk” are defined as capital outflows in a severe, low-probability event (that with 5% probability or less). The left tail ‘fattens’ if bad outcomes become more likely and/or the “5% probability event” becomes more severe – shown by the shift from A (Capital Flows-at-Risk of 1.2% of GDP) to B (Capital Flows-at-Risk of 4.2% of GDP).
by Martin Feldstein, Chicago: University of Chicago Press. 7 Rose (2007), A stable international monetary system emerges: Inflation targeting is Bretton Woods, reversed, Journal of International Money and Finance, Elsevier, vol. 26(5), pages 663-681, September. 8 See Chapter 3 of the October 2018 IMF World Economic Outlook. 9 Cesa-Bianchi et al (2015), Global Liquidity, House Prices, and the Macroeconomy: Evidence from Advanced and Emerging Economies, Journal of Money, Credit and Banking, show that for AEs flexible exchange rates dampen the impact of push shocks, whereas for EMs they can amplify the impact of push shocks via a collateral valuation effect 10 See Chapter 2, IMF April 2016 World Economic Outlook. 6  All speeches are available online at www.bankofengland.co.uk/speeches  6    An effective macroprudential policy toolkit to curtail the damaging extremes of domestic financial cycles. Macroprudential policy can guard against rapid credit growth, which is amongst the best early warning indicators of an impending downturn. 11 And higher domestic bank capital ratios reduce the sensitivity of capital inflows to changes in global volatility.12    And deep domestic capital markets to reduce the reliance on foreign investors and the need to issue in foreign currency, which dampens capital flow volatility (Chart 6).