The adoption of specific measures of this new toolkit obviously depends on how each of us assesses its own local credit and asset market potential vulnerabilities. Some EMEs imposed tighter limits on financial institution and household leverage. In East Asia, for example, policies included loanto-value and debt-to-income ceilings on real estate lending. In Brazil, we increased capital requirements on riskier consumer loans and imposed a minimum payment floor on credit card balances. And we also imposed taxes on capital inflows and a reserve requirement on banks’ foreign exchange spot positions. The important outcome was that this pragmatic response worked. Therefore, macroprudential measures, including those that target specific capital flows directly, became an important part of the policy framework to address sudden floods and sudden stops. In complement to traditional macroeconomic policy responses, these measures showed that they can help ensure macro-financial stability. There are many quarters, ranging from academia to the IMF itself2 that are increasingly subscribing to this view. However, there are also reputational costs to implementing these policies, which I will address a little later. But what do we mean by “it worked”? In Brazil’s case, it means the following: (a) macroprudential policies contributed to bringing down the pace of credit expansion to more sustainable levels; (b) they were successful in improving the maturity and composition of international financing; and (c) they also reduced foreign exchange volatility.

Therefore, in considering the role of monetary policy in addressing financial stability, this direction would consider new policy-reaction rules for central banks that would be augmented to include a financial or credit gap argument of some sort. We are certainly in Brazil – but also elsewhere – reflecting about these analytical lessons from the crisis. Due to our history of greater volatility, emerging market economy central  3  Studies from an emerging market perspective include IMF (2013a) and Agénor and Pereira (2013). BIS central bankers’ speeches  3  banks such as Brazil’s never relegated financial stability concerns to a secondary status. Our inflation targeting framework had always been complemented by strong financial sector regulation and prudent foreign exchange policies. To be fair, very pragmatically, in the post-crisis environment of unprecedented global liquidity, emerging markets somehow implicitly used this separation principle: we used macroprudential policies in order to counteract the effects of intense and volatile capital flows on credit and asset markets; and this allowed monetary policy under the IT regime to maintain its focus on price stability. However, this pragmatic policy mix might be effective, but is not without costs, especially because we still do not fully know how some of these macroprudential tools work4. That introduces important issues of credibility for central banks and poses challenges for the formation of expectations about the yield curve that are critical for monetary policy. Therefore macroprudential policy, particularly measures that target capital flows, combined with traditional monetary policy creates significant communication challenges for central banks.