Are preemptive capital controls useful?
In this paper Das et al. undertake a systematic analysis to investigate the effectiveness of preemptive capital flow management (CFM) in the face of risk-off shocks. They argue that as CFMs on inflows before a risk-off shock are often perceived differently by foreign investors than CFMs on outflows during the shock, it is important to treat them as distinct capital account policies. Das et al. use high-frequency monthly data from 56 EMDEs during 1996-2020 and find:
- Countries which had these policies in place any time during the window of five years prior to the risk-off shock, in a preemptive manner, experienced 30% lower interest rate premia when borrowing externally in local currency during the given risk-off shock.
- These preemptive CFMs also lead to lower exchange rate volatility during the risk-off shocks.
- Lower premia during risk-off shocks preserve countries’ access to international markets when they arguably need it most.
Preemptive Policies and Risk-Off Shocks in Emerging Markets
Authors: Mitali Das, Gita Gopinath, Sebnem Kalemli-Ozcan
From: International Monetary Fund, University of Maryland
