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).
The analysis focuses on the effect of push and pull shocks on capital flows in the  contemporaneous quarter and the subsequent two quarters. In a second specification the role of a set of additional factors (X) in affecting the sensitivity of capital flowsat-risk to global push shocks is considered. This is done by adding an interactive effect to equation (1): 37 KF@R = α + β 𝑃𝑢𝑠ℎ + γ 𝑃𝑢𝑙𝑙 + δ X + θ (𝑃𝑢𝑠ℎ ∗ X) + 𝑢  (2)  A series of factors is considered: in one specification the focus is on the share of foreign currencydenominated debt and a measure of reserve adequacy, while in another specification the role of macroprudential policy is analysed. 34  The FCI is the first principal component of the following series: long term government bond yields, term spreads, sovereign spreads, interbank spreads, corporate spreads, equity returns, equity volatility and financials market capitalisation (normalised by the broader market). These indices are based on those presented by the IMF in their April 2017 GFSR. 35 The main difference between this specification and the one proposed by the IMF in their October 2018 GFSR is that they consider capital flows in aggregate across EMs and, consequently, can only look at the effect of push factors. The choice to do this in a panel setting with country-specific series means pull factors can be incorporated into the analysis. The current analysis also broadens the scope from portfolio flows to different types of capital flows.