Abstract

This paper analyzes the use of capital flow measures in emerging markets. Drawing on a specially compiled new database of capital flow measures, it establishes that policy makers in emerging market economies do not use capital flow measures as an active tool at business cycle frequency. While there is a general trend toward the liberalization of capital accounts, the use of capital flow measures as a countercyclical policy tool is rather sporadic. Instead, countries show a distinct preference for using monetary policy, exchange rate adjustments, macro prudential measures, and adjustments in external reserves to modulate the impacts of domestic business cycles, international liquidity cycles, and shocks to capital flows. Regulation of different kinds of capital flows -- resident and nonresident flows; inflows and outflows; and foreign direct investment, portfolio, and banking sector flows -- is changed infrequently and is acyclical to domestic business and external liquidity cycles.

Highlights

  • Capital flows to emerging market economies are considered to be volatile, often driven more by external factors than by domestic factors

  • We ask how other macroeconomic policy tools, such as monetary policy, exchange rate adjustments, foreign reserves, and macro prudential measures are used in emerging market economies, and how the use of these other tools correlates with capital flow measures (CFMs)

  • We analyze the use of capital flow measures by emerging market economies

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Summary

Introduction

Capital flows to emerging market economies are considered to be volatile, often driven more by external factors than by domestic factors. A view that has gained some currency since the global financial crisis is that the emerging market economies may be better off by keeping their capital accounts relatively closed (Rey, 2015); or by managing their capital account policies in a countercyclical fashion (IMF, 2012), designing them as a regular instrument of economic policy and not just as a measure of last resort (Jeanne, Subramanian, and Williamson, 2012). Despite an active policy debate around it, and some theoretical contributions, not much is known about whether and how emerging market economies use capital flow measures (CFMs) in practice.. We relate the use of capital flow measures to domestic business cycles, capital flow cycles, and to global financial cycles; and compare the use of CFMs with a full array of policy tools including monetary policy, macroprudential measures, exchange rate adjustment and use of external reserves.

Literature Survey
Construction of the Data Set
Stylized Facts on the Use of Capital Flow Measures
Are CFMs Used as a Cyclical Policy Tool?
Domestic Economic Cycles and Capital Flow Measures
Capital Flow Cycles and Capital Flow Measures
Global Financial Cycle and Capital Flow Measures
Alternative Specification and Robustness Tests
Findings
Conclusion
Full Text
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