Capital Flow Management Measures Research Articles

Capital flows-at-risk: Push, pull and the role of policy

We characterise the probability distributions of various types of gross capital flows conditional on information contained in financial asset prices in a panel of emerging market economies, with a focus on ‘tail’ events. Our framework, based on the quantile regression methodology, allows for a separate role of push- and pull-type factors. We find that both push and pull factors have heterogeneous effects across the distributions of gross capital flows, which are most marked in the left tails. We then explore the role of the pre-existing stance of macroprudential and capital flow management policy in shaping probability distributions of capital flows. Macroprudential and capital flow management measures can both be stabilising, leading to less volatile flows and in particular to lower chances of large portfolio outflows. A tighter macroprudential stance can also reduce the sensitivity of portfolio flows to global financial shocks.

The external financial spillovers of CBDCs

We set up a DSGE model to study the macroeconomic consequences of a foreign central bank digital currency (CBDC) available to residents in a small open economy. We find that a gradual and permanent increase in the domestic households' preferences toward the foreign CBDC leads to a structural reduction in economic activity, especially if the CBDC is designed to be similar to domestic deposits. Imposing capital flow management measures on outflows, relaxing macroprudential policy, or selling foreign reserves can smooth the transition. A Taylor rule that targets PPI inflation is more effective in limiting the disruptive effects than a CPI targeting or an exchange rate peg. A central bank's liquidity facility available to commercial banks is able to avoid the long-run GDP loss, at the cost of a larger short-run consumption fall. We also show that an economy with a large stock of foreign CBDC is better shielded from exogenous increases in the interest rate on foreign debt, if the CBDC remuneration remains constant.

아시아 4개국의 국제자본 통제정책을 고려한 새 외환시장 압력지수에 관한 연구

Purpose - An exchange market pressure index (EMP) exhibits not only exchange-rate fluctuations but also the changes of government tools to manage exchange rates. Therefore, it is useful to estimate hidden pressures that exist in foreign exchange markets. This study suggests a new EMP that might have more information on foreign exchange markets than other indices.
 Design/Methodology/Approach - We include a capital-flow management (CFM) measure as another component in our new EMP to consider the role of CFMs for managing exchange rates. This new index is then applied to the four Asian countries of South Korea, Malaysia, Philippines, and Japan to analyze their foreign exchange markets.
 Findings - We found that the new EMP sends stronger signals before and during the currency crises than existing indices. Moreover, the volatility of emerging market EMP is stronger than that of advanced countries because the former group changes CFM policies more frequently than the latter . These findings suggest that the new EMP might describe exchange rates and pressures in foreign exchange markets better than other indices.
 Research Implications - To our best knowledge, this study is one of few attempts to incorporate CFM measures into an EMP to consider the effectiveness of CFMs in managing exchange rates.

The Incidence of Capital Flow Management Measures: Observations from a New Database

The Incidence of Capital Flow Management Measures: Observations from a New Database

The International Monetary Fund and capital flows

AbstractControls on international capital flows were a central issue for the International Monetary Fund at Bretton Woods in 1944. But by the 1970s, mainstream thinking was encouraging open capital flows. A succession of damaging crises followed: Latin America in the 1980s, Mexico again in 1994, and Asia in 1997. Fund policies were tweaked, but the causes were seen as being largely in the recipient countries. Capital controls were specifically rejected.Nevertheless, the Fund’s view began to shift, probably encouraged by the 2008 global financial crisis. There was a growing recognition that the capital-flow surges at the heart of these crises were often externally driven, reflecting global factors. The appropriate response would include capital flow management (CFM). The Fund recognized this in its 2012 Institutional View, but CFM was at the bottom of the policy toolbox, surrounded by conditions and constraints, maintaining the stigma on CFM.Meanwhile many emerging economies were enhancing their ability to cope with excessive capital flows, although at some cost (slower growth, tighter fiscal policy, large foreign-exchange reserves). At the same time the flows were increasing, with a bigger component of flighty portfolio flows. CFM measures still have an important place in this new environment, but the Fund’s reluctance to embrace them means that a deep discussion on operationalizing effective CFMs is still lacking.

Review of The Institutional View on The Liberalization and Management of Capital Flows — Background Note on Capital Flows and Capital Flow Management Measures — Benefits and Costs

"Volume 2022 (2022): Issue 009 (Mar 2022): Review of The Institutional View on The Liberalization and Management of Capital Flows — Background Note on Capital Flows and Capital Flow Management Measures — Benefits and Costs" published on 30 Mar 2022 by International Monetary Fund.

Policy Space for Capital Flow Management: An Empirical Investigation

ABSTRACT Many in the academic community have identified that some trade and investment treaties restrict the ability of nation states to regulate volatile capital flows to prevent and mitigate financial instability. This paper quantifies the variation across preferential and free trade agreements with respect to their policy space for capital flow management measures. With these data we create a composite score of treaty flexibility and examine the collective level of policy space across the global trade regime. We find that the majority of trade treaties leave significant policy space for regulating cross-border finance in the world economy. South-South treaties tend to have the most policy space, whereas North-South and North-North treaties have less. When weighted by the level of gross domestic product (GDP) and incoming foreign investment however, we find that those treaties with the least amount of policy space for capital flow measures represent 65% of world GDP and 48% of global capital flows. What is more, it appears that the global trend is toward treaties without the policy space for appropriate regulation.

Is capital flow management effective? Evidence based on U.S. monetary policy shocks

It is challenging to empirically test if emerging markets employ countercyclical capital flow management to combat the large flows driven by global factors, and whether such policy is effective in containing capital flows. The first challenge is that a good gauge of the cyclical dynamics of capital flow management measures is hard to obtain. In addition, the causal effects of capital flow management on capital flows are difficult to establish as such policies are usually endogenous responses to capital flows. We address these issues by using U.S. monetary policy shocks as instruments for a recently developed measure of capital flow management that captures both extensive and intensive margins of policy actions. We find that for a panel of 15 emerging market economies, U.S. monetary policy shocks at quarter t − 1 lead to adjustments to the capital flow management in these countries at t, which then affect capital flows at t + 1. In particular, inflow tightening actions increase after dovish U.S. monetary policy shocks and they materially dampen future net portfolio liability inflows.

Capital Account Regulation and National Autonomy: The Political Economy of the New Welfare Economics

Abstract The 2007-2009 Global Financial Crisis (GFC) eroded the consensus around the benefits of capital mobility within mainstream economics. Against this background, this paper discusses to what extent the new mainstream position on capital flow management measures, based on the New Welfare Economics, expands the policy space of developing and emerging economies (DEEs). This paper argues that the new position can be classified as an embedded neoliberal one, given that it keeps liberalization as its ultimate goal, while nonetheless accepting to mitigate some of its harmful consequences. After comparing the capital account policies of China and Brazil, this paper concludes that the policy prescriptions of the New Welfare Economics do not lead to higher levels of national autonomy for DEEs and are likewise unable to curb financial instability in these countries.

Bank Balance Sheets and External Shocks in Asia

In emerging Asia, banks constitute the dominant source of financing consumption and investment, and bank balance sheets comprise large gross FX assets and liabilities. This paper extends the DSGE model of Gertler and Karadi (2011) to incorporate these key features and estimates a panel vector autoregression on ten Asian economies to understand the role of the banking sector in transmitting spillovers from the global financial cycle to small open economies. It also evaluates the effectiveness of foreign exchange intervention (FXI) and other macroeconomic policies in responding to external financing shocks. External financial shocks affect net external liabilities of banks and the exchange rate, leading to changes in credit supply by banks and investment. For example, a capital outflow shock leads to a deprecation that reduces the net worth and intermediation capacity of banks exposed to foreign currency liabilities. In such cases, the exchange rate acts as shock amplifier and sterilized FXI, often deployed by Asian economies, can help cushion the economy. By contrast, with real shocks, the exchange rate serves as a shock absorber, and any FXI that weakens that function can be costly. We also explore the effectiveness of the monetary policy interest rate, macroprudential policies (MPMs) and capital flow management measures (CFMs).

Bank Balance Sheets and External Shocks in Asia: The Role of Fxi, Mpms and Cfms

In emerging Asia, banks constitute the dominant source of financing consumption and investment, and bank balance sheets comprise large gross FX assets and liabilities. This paper extends the DSGE model of Gertler and Karadi (2011) to incorporate these key features and estimates a panel vector autoregression on ten Asian economies to understand the role of the banking sector in transmitting spillovers from the global financial cycle to small open economies. It also evaluates the effectiveness of foreign exchange intervention (FXI) and other macroeconomic policies in responding to external financing shocks. External financial shocks affect net external liabilities of banks and the exchange rate, leading to changes in credit supply by banks and investment. For example, a capital outflow shock leads to a deprecation that reduces the net worth and intermediation capacity of banks exposed to foreign currency liabilities. In such cases, the exchange rate acts as shock amplifier and sterilized FXI, often deployed by Asian economies, can help cushion the economy. By contrast, with real shocks, the exchange rate serves as a shock absorber, and any FXI that weakens that function can be costly. We also explore the effectiveness of the monetary policy interest rate, macroprudential policies (MPMs) and capital flow management measures (CFMs).

Global liquidity, global risk appetite, and the risk of credit and asset booms

This study examines the channels through which net cross-border bank flows and VIX, working through the domestic banking system, could potentially lead to the creation or exacerbation of credit and asset booms that may threaten financial stability. It uses bank firm-level data for the Philippines over the period 1991-2018. Among the study’s significant findings are the following: bank lending to the real estate and housing sector is consistently and significantly affected by net cross-border bank flows (NCBF); non-core bank liabilities is an important variable as it consistently affects the amount of total loans and loans to the commercial and industrial sector as well as bank asset growth and bank leverage; net cross-border flows lower bank asset growth; and banks’ cost of loans tends to be reduced by NCBF and by a reduction in global risk appetite. The use of macroprudential measures-including monitoring bank non-core liabilities and lending to sectors such as real estate-as well as capital flow management measures is warranted in order to prevent bank credit and asset booms from being created or exacerbated, which may threaten growth and financial stability.

Macroprudential Policy during COVID-19: The Role of Policy Space

This paper uses the initial phase of the COVID-19 pandemic to examine how macroprudential frameworks developed over the past decade performed during a period of heightened financial and economic stress. It discusses a new measure of the macroprudential stance that better captures the intensity of different policies across countries and time. Then it shows that macroprudential policy has been used countercyclically—with stances tightened during the 2010’s and eased in response to COVID-19 by more than previous risk-off periods. Countries that tightened macroprudential policy more aggressively before COVID, as well as those that eased more during the pandemic, experienced less financial and economic stress. Countries’ ability to use macroprudential policy, however, was significantly constrained by the extent of existing “policy space”, i.e., by how aggressively policy was tightened before COVID-19. The use of macroprudential tools was not significantly affected by the space available to use other policy tools (such as fiscal policy, monetary policy, FX intervention, and capital flow management measures), and the use of other tools was not significantly affected by the space available to use macroprudential policy. This suggests that although macroprudential tools are being used countercyclically and should therefore help stabilize economies and financial markets, there appears to be an opportunity to better integrate the use of macroprudential tools with other policies in the future.

Caught in the Crosswinds

A case study approach is used to assess the multi-pronged policy response of seven small financially open economies with flexible exchange rate regimes to external shocks following the global financial crisis. FX intervention was frequently used— including during outflow episodes to prevent disorderly depreciation and preserve financial stability. Monetary policy often considered both financial and external stability. Capital flow management measures were sometimes calibrated symmetrically over the cycle while macroprudential measures were mostly deployed during inflow episodes. Assessment of the macroeconomic conditions paints an inconclusive picture on the benefits or costs of such policies, suggesting the need for further analysis.

Safety First: Expanding the Global Financial Safety Net in Response to COVID‐19

AbstractWe call for strengthening the Global Financial Safety Net (GFSN) to manage the economic effects of COVID‐19, in particular the massive capital outflows from emerging market and developing economies EMDEs and the global shortage of dollar liquidity. Both the United Nations (UN) and the International Monetary Fund (IMF) estimate that EMDEs need an immediate $2.5 trillion, yet the financing available to them is just $700 to $971 billion. To meet these immediate needs we propose to: (1) broaden the coverage of the Federal Reserve currency swaps; (2) issue at least $500 billion of special drawing rights through the IMF; (3) improve the IMF’s precautionary and emergency facilities; (4) establish a multilateral swap facility at the IMF; (5) increase the resources and geographic coverage of regional financial arrangements; (6) coordinate capital flow management measures; (7) initiate debt restructuring and relief initiatives; and (8) request that credit‐rating agencies stop making downgrades during the emergency. It argues that leaders should swiftly move to address these structural gaps in the GFSN: (1) agree on a quota reform at the IMF; (2) create an appropriate sovereign debt restructuring regime; (3) expand surveillance activity; and (4) adopt IMF governance reform and strengthen its relations with all agents of the GFSN. All of these reforms must be calibrated toward a just transition to a more stable, inclusive, and sustainable global economy.

Comments on A Framework for Regional Banking Regulation in ASEAN

Comments on A Framework for Regional Banking Regulation in ASEAN

The Chair’s Summing Up Independent Evaluation Office - IMF advice on Capital Flows Executive Board Meeting 20/93 September 18, 2020

Executive Directors welcomed the report of the Independent Evaluation Office (IEO) on IMF Advice on Capital Flows. Directors appreciated the high quality of the report, and its thematic and background country studies. Directors welcomed the finding that the adoption of the Institutional View (IV), along with the development of other frameworks and additional tools, had represented a major advance in the Fund’s policy framework to provide systematic advice to member countries on the management of capital flows and capital account liberalization. Directors also noted the conclusion that, in its application, the Fund had generally followed the IV and other policy frameworks to ensure that the advice was consistent, tailored to country circumstances, and evenhanded across countries. Directors welcomed that capital flow management measures (CFMs) have generally not been used to substitute for warranted policy adjustments. Directors also welcomed the finding that most authorities broadly support the IV’s sequenced framework to capital account liberalization and appreciated the Fund’s specific advice in many cases, especially in the context of technical assistance. More recently, faced with the abrupt capital flow reversals during the COVID-19 crisis, Directors noted that emerging markets and developing economies generally followed a multi-pronged approach broadly consistent with the IV framework and made relatively little use of CFMs.

Statement by the Managing Director on the Independent Evaluation Office Report on IMF Advice on Capital Flows Executive Board Meeting September 18, 2020

As noted in the report, the adoption of the IV represented a major advance in the IMF’s policy framework to provide advice on capital account liberalization and the management of capital flows. Before the adoption of the IV, there was no consistent framework to guide policy advice on these areas. The IV was a major step towards filling the gap existing at the time. It welcomed the economic benefits of capital flows while recognizing the risks associated with capital flow volatility, developed a playbook for safe capital account liberalization, and incorporated capital flow management measures (CFMs) into the policy toolkit. It also noted the importance of international cooperation on capital flow policies in allowing countries to harness the benefits of capital flows safely, while minimizing negative spillovers. It was a demonstration of the institution’s flexibility and willingness to embrace theoretical advances and lessons from experience.

Recalibration of capital controls: Evidence from the IMF taxonomy

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.

Caught in the Crosswinds: The Experiences of Selected Economies Responding to External Volatility with Multiple Policy Levers

A case study approach is used to assess the multi-pronged policy response of seven small financially open economies with flexible exchange rate regimes to external shocks following the global financial crisis. FX intervention was frequently used- including during outflow episodes to prevent disorderly depreciation and preserve financial stability. Monetary policy often considered both financial and external stability. Capital flow management measures were sometimes calibrated symmetrically over the cycle while macroprudential measures were mostly deployed during inflow episodes. Assessment of the macroeconomic conditions paints an inconclusive picture on the benefits or costs of such policies, suggesting the need for further analysis.