This research project establishes the conditions under which international capital flows are a force for stability, thereby improving the capacity for macroeconomic policy to avoid large boom-bust cycles.
Financial globalization is a major structural change that fundamentally alters the macroeconomic environment facing policymakers around the world. In one direction, the response of international investors is a major factor in determining the success or failure of domestic macroeconomic policies. In the other direction, international financial shocks are an external source of macroeconomic instability that poses difficult challenges for domestic policymakers. Establishing the conditions under which international capital flows are a force for stability rather than a source of instability helps in the design of new types of macroeconomic and financial-sector policies so that the likelihood of another crisis can be drastically reduced in the future and, if such a crisis occurs, the macroeconomic and fiscal costs can be much smaller.
