This long-standing and widely held view reflects the 4  The analysis of Gita Gopinath, Emmanuel Farhi, Matteo Maggiori and Jeremy Stein, amongst others, emphasises the persistence in the structure of the current IMFS. 5 See Corsetti, G, Dedola, L, and Leduc, S (2010), ‘Optimal Monetary Policy in Open Economies’, Handbook of Monetary Economics, Vol. 3, Chapter 16, pp. 861-933; and Benigno, G and Benigno, P (2006), ‘Designing targeting rules for international monetary policy cooperation’, Journal of Monetary Economics, Vol. 53(3), pp. 473-506. In the standard welfare-based analyses of optimal monetary policy in an open economy, a key consideration is the extent to which sticky prices in different currencies lead to deviations from the law of one price (LOOP) for different goods. The first-best (efficient) outcome is for goods to sell for the same price when converted into different currencies. If this is not the case, demand is misaligned internationally, which in turn creates an inefficient allocation of factor inputs. Under PCP, the full flexibility of import prices means the exchange rate can act as an efficient shock absorber, adjusting to ensure that the LOOP holds. 5  All speeches are available online at www.bankofengland.co.uk/news/speeches  5  beliefs that any externalities that might exist are almost trivially small and that trying to address them would be fine-tuning to the nth degree. The mainstream view is increasingly anachronistic for several reasons.
The purple bars build on the contribution of pull factors to the conditional 5th percentile of capital flows in the current quarter and two quarters ahead. Pull factors are proxied by domestic financial condition indices (DFCIs), which are mean-orthogonalised by a global financial conditions index (GFCI). The coefficient on the DFCIs is estimated by panel quantile regressions. Push factors are proxied by the Bank of England’s global financial conditions index. The chart shows PPP-weighted averages across the 13 EMEs in our panel. Chart 7: For EMEs, market-based finance accounted for all the increase in foreign lending since the crisis Structure of external liabilities for emerging market economies  Sources: IMF, EPFR and Bank of England calculations  20  All speeches are available online at www.bankofengland.co.uk/news/speeches  20  Chart 8: Market-based finance flows are particularly sensitive to push shocks The sensitivity of Capital Flow-at-Risk to push factors, by source of capital flow FDI  Banking  Market-based finance  of which: investment funds 0 -1 -2 -3 -4  Median  5th percentile  -5 Capital Flows-at-Risk as a % of GDP  Sources: IMF, EPFR, Bank calculations. Notes: Chart shows the sensitivity of different capital flows to a negative "push" shock. Coefficients are standardised by each component’s share of total flows e.g. the red MBF bar shows how total Capital Flows-at-Risk would respond to a one standard deviation tightening in global financial conditions if all capital flows were accounted for by MBF.