It is manifested in exchange rate regimes that still permit relatively limited variability against the dollar. It is manifested in the extent of reserve accumulation, in part the consequence of resistance to exchange rate appreciation. And it is manifested in the remaining controls on capital movements and the occasional experimentation with the introduction of new controls. The search for durable insurance against future volatility is an understandable response to the searing experience of the crises of a decade ago. But there is risk in this as well. And the incomplete embrace of integration could contain the seeds of future vulnerability. In this sense, the policy agenda needs to move from a focus on creating stronger defenses against crisis to building a greater ability to adapt to change. This requires strong institutions for the management of macroeconomic policy so that the monetary and fiscal policies are able to respond to shocks in a credible manner. It requires strong financial institutions with a substantial capacity to absorb losses and cope with volatility. It requires regulatory policies that encourage competition and innovation, with strong protections for property rights, low barriers to entry and effective financial supervision. And it requires investments in a nation’s human capital, in education, healthcare and pension provision. This complement of policies improves the prospects for producing the mix of flexibility and resilience necessary for sustained growth in a more integrated world economy.
This reluctance can partly be explained by the fact that retail bank customers regard cash holdings as an attractive alternative to bank deposits, and could withdraw their deposits if interest rates turn negative, thereby depriving the banks of an important refinancing source. Thus, uncertainty over the collective behaviour of bank customers could be seen as a factor dissuading banks from passing on negative interest rates. As a result, banks’ liability margins – the difference between the interest on a maturity-matched alternative funding source and the interest on deposits – have dipped into negative territory.4 This is clearly illustrated in chart 6. Banks have responded to the pressure on liability margins by raising mortgage rates (i.e. by increasing the asset margin). In principle, the slight rise in mortgage rates is good news from a financial stability standpoint. So can negative interest rates even be regarded as a tool to combat imbalances on the  2  Cf., for instance, O. Jordà, M.HP. Schularick & A.M. Taylor, Betting the House, NBER Working Paper 20771, 2014, M.D. Bordo & J. Landon-Lane, Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence, NBER Working Paper 19585, 2013, or L. Gambacorta, The Risks of Low Interest Rates, Ensayos Sobre Política Económica, 29, 64: 14-31, 2011. 3  The same applies to all bank loans. 4  The bank’s total margin is made up of three components: asset margin, liability margin and transformation margin, minus any hedging costs (so-called structural contribution).