But case law is rapidly emerging, including on their potentially adverse crossborder spillover consequences (Forbes et al (2013) and Magud et al (2011)). Looking to the future, it is realistic to think that better-defined, internationally-agreed “rules of the road” could emerge for capital flow management policies in the period ahead. Macro-prudential policies have also come significantly into fashion over recent years, with many countries implementing them and a number having distinct, if still fledgling, macroprudential frameworks (Nier et al (2011)). Case law is being built rapidly and empirical evidence is emerging on the efficacy of different macro-prudential tools (Lim et al (2011) and Kuttner and Shim (2013)). The new Basel III banking rules have added international momentum to this policy trend. They introduce, at an international level, an explicitly macro-prudential capital requirement – the Counter-cyclical Capital Buffer (CCB). This adjusts regulatory capital rules over the credit cycle, to help build resilience and smooth booms and busts. The CCB rules also hard-wire in a degree of cross-country co-ordination – a “reciprocity provision”. In particular, there is a presumption that any adjustment in the CCB buffer by one country is reciprocated by countries whose banks are lending into that country. In that way, the potentially sterilising impact of cross-border capital flows on domestic macro-prudential measures is reduced. This reciprocity provision makes sense in a world of highly correlated cross-border banking flows. Chart 19 plots cross-border bank claims across a selection of countries over time. It suggests a high degree of cyclicality in cross-border credit.

2  BIS central bankers’ speeches  employment since 1997. It is difficult to understand why firms should increase employment so significantly if their existing workforce is not fully utilised. Some of this behaviour may be explicable if employment growth were concentrated in sectors of the economy which are expanding most quickly, especially those orientated towards the export sector. But it is striking that this pattern of rising employment and weak productivity is common across most sectors of the economy (Chart 2).5 It is also possible that firms in some parts of our economy are having to work flat out just to generate the same amount of business. Estate agents, for example, trying to match buyers and sellers in a thin housing market. Or M&A teams pitching for new business. The extra effort that is required may explain why these types of companies do not report much spare capacity. But it does not help to explain why companies facing these types of pressures should want to expand greatly their workforces. It is hard to reconcile the number of new jobs created over the past year with the belief that firms are sitting on a substantial margin of spare capacity. The recent weakness in productivity may also have been exaggerated by the sheer difficulty of measuring economic activity in real time. We know that early estimates of output are often revised as more comprehensive data become available. Recent productivity may look less disappointing if subsequent estimates of output are marked up.