CAPITAL FLOWS AND THE INTERACTION BETWEN MACROPRUDENTIAL POLICY AND MONETARY POLICY

Macroeconomic and financial instability in an inflation-targeting context poses important challenges to emerging economies. The particular case of capital flows into emerging economies is analyzed here as one cause of said macroeconomic and financial instability. Before the recent global crisis, the notion of "separability", i.e., that the objectives of price stability and financial stability are independent of each other, dominated the policy regimes of countries that explicitly sought to achieve financial stability. However, after this crisis it became clear that both are connected locally and internationally. Such links suggest that central banks should take into account the cross effects of monetary policy and financial measures, including among their goals to safeguard financial stability.