Managing House Price Booms in Emerging Markets

Min ZhuBy Min Zhu

(Versions in 中文 and Español)

For the past decade, house prices have steadily increased in the vast majority of the 30 countries that make up the IMF’s House Price Index for Emerging Markets released today at a conference organized by the IMF and the Indian Institute of Management in Bangalore, India (Figure 1).

The index shows a lull in the aftermath of the global financial crisis, followed by an increase for nine consecutive quarters since 2012. This run-up—four times as fast as that in advanced economies—would be even more pronounced if the larger countries in the group such as China and India receive greater weight in the index.

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“Macro…, what?!” The New Buzz on Financial Stability

When carefully implemented, macroprudential policy can become a cornerstone of financial stability policy. The dictionary of financial lingo has been given an important new entry.

Reducing the Chance of Pulling the Plug on Liquidity

The near collapse of the financial system that set off the global crisis was due in part to financial institutions suddenly lacking access to funding markets, and liquidity drying-up across securities markets. Financial institutions did not factor in how their own responses to a liquidity shortfall could make the entire system shut down. But, it only takes a few institutions to pull the plug on a liquidity-filled bathtub before it runs dry, and the central bank needs to open the spigots again. The key then is to make sure that firms have less incentive to pull the plug. To do that, in the latest Global Financial Stability Report, we have come up with a way to measure how much an individual financial institution contributes to system-wide liquidity risk.

Macro-Prudential Policies: Putting the “Big Picture” into Financial Sector Regulation

The devastating impact of the global financial crisis created a consensus that pre-crisis financial regulation didn’t take the “big picture” of the system as a whole sufficiently into account and, as a result, supervisors in many markets “missed the forest for the trees.” In other words, they did not take into account the macro-prudential aspects of regulation, which has now become the focus of many authorities. Macro-prudential policies were the focus of discussions in Shanghai earlier this week, where The Peoples’ Bank of China hosted conference titled Macro-Prudential Policies: Asian Perspectives, that brought together central bankers and senior financial officials around the world. At the conference, there was wide agreement that the first step in designing macro-prudential policies ought to be a convergence of views regarding the objectives of such policies.

Just Do It—Shaping the New Financial System

The crisis exposed fundamental weaknesses in many areas of the world economy, the most obvious being dramatic deficiencies in the regulation and supervision-nationally and internationally-of financial institutions and markets. On the bright side, the crisis provided the impetus for a major overhaul of the financial regulatory system. So, are we making the most of this opportunity to fix the system? A new Staff Position Note, Shaping the New Financial System, examines just how far we’ve come and, more importantly, how much further we have to go. The good news is that policymakers have made important progress in some areas, and the work underway is moving in the right direction. The bad news is that we are barely half way there and the hardest part may lie ahead. Indeed, unless there is concrete progress over the next 12 months in a few key areas, we may well sow the seeds of the next financial crisis.

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