If reserve losses are sterilized and the underlying cause of capital outflows is not addressed, reserves losses can be persistent. Macroprudential policy provides an additional tool that can add degrees of freedom and help soften the tradeoffs of the trilemma. Macroprudential policy can potentially temper spillovers by modulating the type of buildup of financial imbalances that contributed to the Asian crisis of 1997, countless other emerging market crisis, the global financial crisis of 2008 and the subsequent euro area crisis of 2011. Progress continues to be made in designing macroprudential policy frameworks, in definition of objectives, and in developing appropriate instruments, calibration and communication. Capital flow management can be viewed as the part of the macroprudential toolkit that operates across borders. Over the last five years, capital flow management has received increased attention, first in managing inflows and, more recently, in managing outflows.6 A consensus has emerged that capital flow management can be useful as part of a broader set of policy tools. In fact, the effectiveness of capital flow management may be limited if not appropriately supported by monetary, fiscal, exchange rate and prudential policies, or the  5  Obstfeld, Shambaugh and Taylor (2005), Goldberg (2013), Klein and Shambaugh (2015) and Obstfeld (2015). 6  G20 (2010), IMF (2012), Farhi and Werning (2014) and IMF (2015). 2  BIS central bankers’ speeches  warranted macroeconomic adjustment. Also, capital flow management practices that are transparent, temporary, and targeted seem to work best.

It is sufficiently larger than the negative investment demand effect from higher interest rates, such that internal balance is attained and monetary policy is able to pursue domestic inflation and growth objectives.4  1  Linda Goldberg, Paolo Pesenti, Joseph Tracy and Matthew Higgins contributed to these remarks. 2  A global financial cycle refers to the global co-movement of credit by banks and capital markets, asset prices, term premia, and risk premia. 3  Fleming (1962) and Mundell (1963). 4  Krugman (1999). The balance sheet effects imparted from a large international debtor position may work against achievement of an improved external balance and attainment of internal balance. BIS central bankers’ speeches  1  Different policy options are available to a country with a high degree of capital mobility and a preference for currency stability. A country may prefer currency stability as an effective nominal anchor, or because of concerns about the broader uncertainties associated with currency volatility. Regardless of the reason and because the exchange rate is not available to absorb external shocks, this country will be in an unfavorable position to achieve domestic macroeconomic objectives by using monetary policy. Instead, monetary policy is aimed at external adjustment. Tighter foreign monetary policy and financial conditions need to be validated by tighter domestic monetary policy to maintain currency stability. With domestic monetary conditions effectively imported from abroad, they may sometimes conflict with domestic growth and inflation objectives. Simply put, currency stability is prioritized. These policy considerations are summarized in the well-known international policy trilemma.