Emerging market nations can be adversely affected by large swings in investment and, therefore, must develop tools to control credit flows or risk relinquishing any independent monetary policy, a study shows.

These findings were presented at the Kansas City Federal Reserve's monetary policy symposium at Jackson Hole, which highlighted the global impact of the unconventional monetary policy of the United States and other major central banks.

Many countries, including India and Brazil, have recently experienced steep sell-offs in their currencies, linked in part to the prospect that the Fed might soon dial down the pace of its bond-buying monetary stimulus.

The Jackson Hole study highlights a shift in conventional economic thinking, which used to champion an open flow of money between countries, regardless of the consequences.

"Macroprudential policies are necessary to restore monetary policy independence for the noncentral countries," wrote Helene Rey, professor at the London Business School. "They can substitute for capital controls, although if they are not sufficient, capital controls must also be considered."

That, said the study, is because countries with floating exchange rates, the dominant global practice, would be abdicating their control over interest rates and credit creation from sources outside their control.

"Independent monetary policies are possible if - and only if - the capital account is managed, directly or indirectly, via macroprudential policies," Rey said. These can take many forms, including efforts to restrain credit growth in particular areas of the economy.

"Since, for a country, the most dangerous outcome of inappropriately loose global financial conditions is excessive credit growth, a sensible policy option is to monitor directly credit growth and leverage in each market," she said.

Terrence Checki, executive vice president of the Federal Reserve Bank of New York, charged with commenting on the paper, pushed back against the notion that rich-country central banks should start paying more attention to the international effects of their policies.

He said that, in keeping with conventional wisdom at the Fed, monetary policy should be aimed at domestic objectives.

"It's not clear we can control the financial cycle very well with monetary policy," Checki said. – Reuters