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The case for macroprudential policy as a stabilizing tool for the euro area

Michaela Posch (), Stefan Schmitz, Katharina Steiner () and Eva Ubl ()
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Michaela Posch: Oesterreichische Nationalbank
Katharina Steiner: Oesterreichische Nationalbank, Foreign Research Division
Eva Ubl: Oesterreichische Nationalbank, Financial Markets Analysis and Surveillance Division

Monetary Policy & the Economy, 2019, issue Q1-Q2/19, 124-138

Abstract: Current account deficits are not destabilizing per se and cross-border capital flows can contribute to the economic convergence of the euro area and private risk-sharing if monitored more adequately than provided for by the current macroeconomic governance framework of the European Union. Macroprudential policy could fill this gap. This would allow countries with lower capital stocks to continue importing capital and to strengthen private risk-sharing in the euro area, while avoiding negative side effects, such as excessive credit growth and the risk of a balance of payment crisis. We make a case for broadening the EU’s macroeconomic imbalances procedure (MIP) to include the assessment of the macroprudential stance, particularly with respect to the possible negative side effects of capital inflows. Our argument is inspired by the effective application of macroprudential policy in Austria in the post-World War II era, when Austria featured a structural balance of payment deficit and liberalized both its capital account and its banking sector without a balance of payment crisis.

Keywords: Macroprudential supervision; capital flows; monetary union (search for similar items in EconPapers)
JEL-codes: E42 E61 F32 F33 (search for similar items in EconPapers)
Date: 2019
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