SINTRA, Portugal, May 25 (Reuters) - Christine Lagarde, managing director of the International Monetary Fund, called on Sunday for closer cooperation among the world’s central banks to cope with the challenges of increasingly interlinked and complex financial systems.
Speaking at a dinner in Sintra, Portugal, to kick off the first annual ECB Forum conference, Lagarde said the potential gains from cooperation could be huge in times of distress as seen during the financial crisis.
“If policies are viewed only from a national perspective, we may end up in a world of ad hoc intervention, less rebalancing, and the potential to export financial instability,” she said in the text of her speech.
“This would be a world of possibly large welfare losses in many countries, with not just spillover effects - from advanced to emerging market economies, but also ‘spillbacks’ - feedback effects from emerging market to large advanced economies.”
The financial crisis has shown that coordinated international action helped prevent disruption spreading to economies around the globe, she said. And these upsides should not be forgotten as the crisis subsides.
“We need a concerted effort to examine the effectiveness of cooperative policy responses, their spillover effects, and their global welfare implications - also in light of the evolution of the financial system,” Lagarde said.
She also said advanced economies could help reduce volatility by communicating clearly the course of their monetary policy.
Discussing the link between financial stability and inflation, Lagarde said the current environment in the euro zone was a sobering reminder of how balance sheet weakness could constrain the ability of banks to support credit and investment, ultimately contributing to low inflation. (Reporting by Eva Taylor; Editing by Sophie Hares)