I would like to offer a few thoughts to launch our discussion today. I will start with the risks and vulnerabilities caused by excessive volatility and procyclicality of capital flows; I will then turn to the policy responses, including means to address the volatility of capital flows directly and issues related to the GFSN (or Global Financial Safety Net). I. Regarding international capital flows, it is fair to acknowledge that we do not have a good benchmark on what would constitute an appropriate level of these flows. There is a trade-off between the costs and the benefits that they bring, and this trade-off varies across countries and over time. Yet, the fluctuations in gross global capital flows do seem to be very procyclical and volatile. If we look at gross inflows in advanced economies for instance, we see that they rose considerably in the years preceding the Global Financial Crisis, from less than 10% in the early 2000s to more than 20% in 2007. Subsequently, they plunged to virtually 0% in 2008 and 2009 and have remained low ever since. Not all types of flows show the same dynamics over time: FDI and portfolio equity flows have been fairly resilient, while bank flows and debt portfolio flows have been very significantly affected, resulting in a marked changed in the composition of gross flows. These sharp fluctuations are clearly not optimal.
Even bearing in mind the caveat that I have outlined earlier on the lack of a clear benchmark, it looks like international capital flows are too abundant in good times, potentially fueling domestic bubbles and destabilizing national financial systems, and prone to “sudden stops” in bad times. Emerging market economies have experienced numerous examples of “surge” episodes of capital inflows followed by perilous sudden stops. Current (and preliminary) data suggest that some EMEs are currently experiencing very large outflows. The potentially destabilizing effects of capital flows may be magnified in the current situation, with disappointingly slow economic growth (of a cyclical and structural nature), high volatility in commodity and asset prices, the persistence of both internal and external imbalances in key countries and regions, substantial amounts of currency mismatch on balance sheets in emerging market economies, etc. BIS central bankers’ speeches  1  II. So what should be done? I think that we should try to be both pragmatic and ambitious. If we are not pragmatic we will waste time exploring paths that will not lead us anywhere, but if we lack ambition we will never make progress. We should, first, develop a framework to prevent excessive capital flow volatility. Here I see three main avenues to explore: (i)  improving the monitoring of capital flows and hence taking forward the work on data gaps on foreign currency exposures and mismatches.