Microsoft Word Thesis Gent (1). doc

 
 

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Figure 5. Capital Flows to Emerging Markets 
Sources: IMF, International Financial Statistics; Haver Analytics; and IMF staff 
estimates. 
Since the global financial market is still not stable, there should be set new policy 
priorities. As the balance sheet leverage is quite high and its reconstruction is in slow 
process the IMF suggests that the balance sheet repair is essential to take place faster. 
While at the same time the regulatory reforms are important to help the financial sector 
be on a sounder footing. Indeed, the fiscal and monetary stimulus, help mitigate the 
problems in short term, thus for longer term the policy should foresee structural 
solutions to these problems in different scenarios. Thus, the government should 
construct the capital structures carefully to best fit the problems of their country in 
order to have financial stability, (IMF, 2011). 
The countries hit by the crises, specifically the European ones, should focus more in 
improving the interaction of sovereign and bank sector. It is important that the 
government of these countries influence the markets that it is possible that their debt 
maturity will get longer, while the reliance on rollovers will decrease. Even though, 
several countries are in this process it will take time to be fulfilled and for the market to 
be convinced, while the impact could be different on each country, (IMF, 2011). 

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However, in order to be more specific, it is important to distinguish the intervention 
measures in advanced and emerging market economies. Before the 2007-08 crises, 
central banks (CBs) in advanced economies have “implemented monetary policy by 
guiding a single short-term interest rate (IMF, 2010, p. 3).” Nonetheless, the same 
report shows that to recover from the crisis, CBs lowered interest rates, such as the 
Bank of Canada (BoC) keeping overnight rates at 0.5 percent, while the Fed in US has 
also integrated similar policies, (IMF, 2010). 
Furthermore, many of the central banks in advanced economies have switched to 
balance sheet policies, some of which are: a) Systemic liquidity easing (intended to 
enhance liquidity and ease liquidity deficits in financial markets); b) Purchase of long-
term public sector securities (their aim is to cut longer-term interest rates and lessen 
stress in longer-term credit markets which will also increase the level of CB reserves); 
c) Purchase of private sector securities (intended to increase credit in financial 
markets); and d) Foreign exchange liquidity provision (which aims foreign exchange 
liquidity injection in “the form of sales of foreign reserves or foreign exchange swaps 
or other derivatives” which increases both sides of the CB’s balance sheet, (IMF, 2010, 
p. 4-6).