their currency, the world will get closer to the monetary stimulus necessary to outweigh excessive fiscal zeal ”, from “ g20 in search of recovery ”, financial times february 2013, http : / / www. ft. com / intl / cms / s / 0 / cec13222 - 76a2 - 11e2 - 856900144feabdc0. html # axzz2o5gvvozi bis central bankers ’ speeches been and is likely to remain very accommodative. moreover, the “ panglossian ” approach to coordination may create difficulties of its own, as i shall illustrate later on. 2. monetary policy limits and the costs of competitive devaluations it would be simplistic to think that countries should always put up with any exchange rate movement generated by policy actions abroad, when the latter aim to address domestic problems and are not carried out through overt currency manipulations. let me list here three reasons why there are limits to non - cooperative policy responses to exchange rate movements following foreign monetary policy shocks. first, it is true that starting in the mid - 1980s the economic literature by and large finds only modest gains from international policy cooperation. 4 this consensus, although not undisputed, 5 has been reinforced by the paradigm shift in international macroeconomic theory from the mundell - fleming - dornbusch model to the new open economy macroeconomics. 6 however, the workhorse open - economy model underlying those results describes a benign, frictionless environment, with only moderate macroeconomic interdependence. these theoretical economies are in an ideal state of “ divine coincidence ” : one policy instrument suffices to achieve all targets, quite independently of policy decisions abroad. 7 in the real world, a number of market frictions – in particular of a financial nature – have been identified as channels of large cross - country spillovers and, hence, as potential sources of non - trivial gains from cooperation – particularly concerning unconventional policies. 8 the ever stronger global integration of trade in goods and services and, in particular, in financial markets makes the issue of central bank cooperation ever more relevant today. second, a group of large, systemically relevant economies has not been affected symmetrically by the crisis. as noted by barry eichengreen, 9 this is an important difference with the interwar period. insofar as they have decoupled from advanced economies, the main policy concern

policies that many emerging markets put in place during the most expansionary phase of advanced economy monetary policies. we have policy space today due to our preventive, cautious and prudent policies that preserved macro - financial stability through the adoption of a pragmatic approach towards capital inflows over the last few years. it is now a well - understood and documented story : ample global liquidity due to easy monetary policies in advanced economies resulted in exceptionally intense capital flows to emerging market economies. and we know that large and volatile capital inflows can potentially lead to economic and financial instability. they are associated with excessive credit expansion, lower quality of loan origination, increased financial system exposure to exchange rate risk, asset price distortions, including excessive exchange rate appreciation, bis central bankers ’ speeches and inflationary pressure, as excessively easy global monetary conditions can boost domestic demand independently from the desired domestic policy stance. in a nutshell, excessive flows are a fertile terrain to grow excessive financial exuberance. the textbook policy response for my country and other emes was to use its floating exchange rate regime, which helps to smooth economic and financial adjustments, while conducting sterilized interventions and international reserves accumulation, which reduces exchange rate volatility and builds a foreign currency liquidity buffer to prepare for reversals. but the intensity of this inflow episode was special as were the circumstances and policy responses in advanced economies1. therefore, brazil and other emerging markets pragmatically complemented their response and other textbook ( aggregate demand ) policies with the implementation of specific macroprudential policy measures to prevent the exuberance deriving from these large inflows to threaten financial stability. 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