Cross-border capital flows -- moving rapidly and in enormous volumes -- have become a pivotal force in the global economy. Market participants have long been sensitive to capital movements, while regulators and political authorities have often held ambivalent views. The official sector recognizes that private creditors are the dominant supplier of funds to banks, corporate borrowers and governments around the world. But central banks and supranational groups like the IMF, as "lenders of last resort", worry that exhuberant capital inflows can quickly turn into a stampede to the door during time of stress . Now known as "sudden stops", this presents a unique source of global systemic shock. While appreciating the societal role of private capital, it is important to recognize the inherent volatility these flows. A new framework helps combine these perspectives, and craft a more "organic" regulatory approach.
How Governments, Banks and Countries Finance Themselves
Each sector of the economy has a financing requirement - either for funding new projects or rolling over previous loans. These Sectoral Financing Needs are unique to each country capital inflows and are at the heart of finance. Each country has its own Sources of Financing, both domestic and foreign. To assess the problem of "sudden shocks" or funding risk, one must evaluate the Volatility and Quality of different types of financing. Over time, the policy goal is to identify stable long-term sources of funding for each sector.
