bank intermediated housing booms. For certain, the busts that followed were differentiated by the declines in output, the deterioration in household and bank balance sheets, and the wider economic effects of the economic crises that followed the financial busts. However, housing or real estate credit booms and busts characterized the vast majority of crises in European countries.

What is clear from all of these experiences is that the global and European policy communities are now more aware of the interactions of balance-sheet and financial sector developments and their consequences for economic performance. Macroeconomic and macrofinancial stability are inextricably linked now more so than before, due primarily to the modernization and globalization of finance and the integration of the economies and financial systems across the globe. This is especially so in Europe where it has been the deliberate objective to create a European economy and financial system.

There are a wide range of studies that document in detail the booms and busts experienced within Europe and it is beyond the scope of this paper to survey that literature (see previous footnote). A unique feature of the booms experienced in EU-NMS countries is that they were fueled mainly by capital inflows emanating from Western European countries and intermediated by European banks. Likewise, the busts occurred mainly as the result of a sudden stop of these flows as Western European countries and banks withdrew from risk taking in order to manage their own financial and economic imbalances.

In going forward, European EMCs, including the non-EU countries aspiring to join the EU, should expect that strong and at time excessive inflows of capital will re-emerge at some point. Accordingly, they should think now about the policy tools that can help prevent surges of inflows and to deal with their potential adverse consequences should they occur in any event. Fortunately, there are lessons that can be learned from the experiences of emerging-market countries in other continents; that is, the crises experienced in Europe are neither unique nor new, even though there may be unique causes and implications within Europe because of its single market process. Many countries have experienced sudden stops of capital inflows and sudden surges of outflows and the ensuing balance-of-payments or capital account crises that ensued. Hence there is a vast history of experience in dealing with booms and busts, including those fueled by housing and real estate sectors. Thus, there are broad policy lessons for preventing a boom from going on too long and lessen the adverse impact of the bust once it comes.

As suggested in recent IMF studies of past housing booms and busts, the following broad conclusions can be gleaned from country experiences.<sup>53</sup>

- When boom conditions emerge, pre-emptive policies are more appropriate if the boom is credit-financed especially by leveraged institutions: the evidence strongly indicates that the following busts tend to be more costly.<sup>54</sup> By contrast, booms with limited leverage and bank involvement tend to dissipate on their own without major economic disruptions.

- Interest-rate hikes are a blunt and costly tool to deal with real estate booms in an otherwise balanced macroeconomic environment, because the hikes required to deflate a boom could entail significant costs in terms of output gaps and inflation rates. Macroeconomic policies are more effective when real-estate credit booms occur as a result of or at the same time as economy-wide overheating.  The evidence suggests that a

> 53 See Crowe et al, 2011a and 2011b. 54

> On this particular point see Reinhart and Rogoff, 2011.

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