Rey at Jackson Hole Espouses Tools to Help Smooth Capital Flows

Central banks in emerging markets and smaller developed nations should use tools such as stress tests and leverage ratios to smooth disruptions caused by capital flows rather than blame larger countries, according to Helene Rey, a professor of economics at London Business School.

“There is a potent global financial cycle in gross capital flows, credit creation and asset prices, which has tight connections with fluctuations in uncertainty and risk aversion,” Rey said in a paper presented today at the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming. “Independent monetary policies are possible if and only if the capital account is managed, directly or indirectly via macroprudential policies.”