Capital controls and emerging markets
Gelos and al. examine the policy responses to sharp portfolio flow movements in 35 emerging market and developing economies during the 1996-2018 period. The authors develop the “capital flows at risk methodology”, which they use to evaluate the effectiveness of these policy responses. They find that a tightening of capital flow measures is linked to larger outflows in the short-run. In addition, they argue that there is little evidence for the effectiveness of monetary and macroprudential policies in shielding countries from capital outflows and surges driven by global shocks, although the latter seem to reduce somewhat the likelihood of capital flow surges in the medium term.
Capital Flows at Risk: Taming the Ebbs and Flows
Authors: R. G Gelos, Lucyna Gornicka, Robin Koepke, Ratna Sahay, Silvia Sgherri
From: IMF
Capital controls and large open economies
The fact that the policy maker in the large open economy can use capital controls to manipulate the world interest rate provides the violation of Korinek’s “first welfare theorem for open economies” (Korinek 2017), and ensures a role for international cooperation. The results in the capital controls literature concerning optimal macro-prudential capital controls is derived from small open economy models. Our results show that those same type of unilateral capital controls would be ineffective for macro-prudential policy in the large open economy. And once we factor in the possibility of strategic interactions and capital controls imposed by the foreign country, non-cooperative capital controls are not only ineffective, they are harmful to the country in crisis.
Capital Controls as Macro-prudential Policy in a Large Open Economy
Authors: J. Scott Davis, Michael B. Devereux
From: Federal Reserve Bank of Dallas, University of British Columbia
