Recalibration of capital controls: Evidence from the IMF taxonomy

Abstract

In this paper we provide empirical evidence on the factors that motivate policymakers to recalibrate capital flow management measures (CFMs). We document that the likelihood of recalibration varies significantly over time, which suggests a duration model framework to empirically characterize the probability of recalibration. We draw on a new high-frequency dataset on CFMs from the IMF’s Taxonomy of Capital Flow Management Measures to analyze how CFMs were adjusted to address capital flow and related economic and financial developments at business cycle frequency. Analyzing 44 advanced and emerging economies that recalibrated CFMs between 2008 and 2019, we find that domestic overheating and capital flow management were key rationales for tightening controls on net inflows, while financial stability and exchange rate objectives were important for tightening measures on net outflows. Countries with non-IT monetary frameworks and non-flexible exchange rate regimes had a higher hazard rate of recalibrating CFMs, consistent with the lack of independent stabilization policies and the limited ability of the exchange rate to act as an effective shock absorber.