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Managing Capital Inflows: The Role of Capital Controls and Prudential Policies

In: Global Financial Crisis

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  • Mahvash S. Qureshi
  • Jonathan D. Ostry
  • Atish R. Ghosh
  • Marcos Chamon

Abstract

We examine whether macroprudential policies and capital controls can contribute to enhancing financial stability in the face of large capital inflows. We construct new indices of foreign currency (FX)-related prudential measures, domestic prudential measures, and financial-sector capital controls for 51 emerging market economies over the period 1995–2008. Our results indicate that both capital controls and FX-related prudential measures are associated with a lower proportion of FX lending in total domestic bank credit and a lower proportion of portfolio debt in total external liabilities. Other prudential policies appear to help restrain the intensity of aggregate credit booms. Experience from the global financial crisis suggests that prudential and capital control policies in place during the boom seem to have enhanced economic resilience during the bust.

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This chapter was published in:

  • Charles Engel & Kristin Forbes & Jeffrey Frankel, 2012. "Global Financial Crisis," NBER Books, National Bureau of Economic Research, Inc, number enge11-2, octubre-d.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 13165.

    Handle: RePEc:nbr:nberch:13165

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    References

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    1. Assaf Razin & Efraim Sadka & Chi-Wa Yuen, 2000. "Do Debt Flows Crowd Out Equity Flows or the Other Way Round?," Annals of Economics and Finance, Society for AEF, vol. 1(1), pages 33-47, May.
    2. International Monetary Fund, 2010. "The Credit Boom in the EU New Member States," IMF Working Papers 10/130, International Monetary Fund.
    3. Enrique G. Mendoza & Marco E. Terrones, 2008. "An Anatomy Of Credit Booms: Evidence From Macro Aggregates And Micro Data," NBER Working Papers 14049, National Bureau of Economic Research, Inc.
    4. Jonathan David Ostry & Atish R. Ghosh & Karl Friedrich Habermeier & Marcos Chamon & Mahvash Saeed Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows," IMF Staff Position Notes 2010/04, International Monetary Fund.
    5. Cardenas, Mauricio & Barrera, Felipe, 1997. "On the effectiveness of capital controls: The experience of Colombia during the 1990s," Journal of Development Economics, Elsevier, vol. 54(1), pages 27-57, October.
    6. Hutchison, Michael & Kendall, Jake & Pasricha, Gurnain Kaur & Singh, Nirvikar, 2009. "Indian Capital Control Liberalization: Evidence from NDF Markets," MPRA Paper 13630, University Library of Munich, Germany.
    7. Harrison, Ann E. & Love, Inessa & McMillan, Margaret S., 2002. "Global capital flows and financing constraints," Policy Research Working Paper Series 2782, The World Bank.
    8. Martin Schindler, 2009. "Measuring Financial Integration: A New Data Set," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 222-238, April.
    9. Shleifer, Andrei & McLiesh, Caralee & Hart, Oliver & Djankov, Simeon, 2008. "Debt Enforcement Around the World," Scholarly Articles 2961825, Harvard University Department of Economics.
    10. Dell''Ariccia, Giovanni & Marquez, Robert, 2005. "Lending Booms and Lending Standards," CEPR Discussion Papers 5095, C.E.P.R. Discussion Papers.
    11. Gupta, Poonam & Mishra, Deepak & Sahay, Ratna, 2007. "Behavior of output during currency crises," Journal of International Economics, Elsevier, vol. 72(2), pages 428-450, July.
    12. Nicolas E. Magud E. & Carmen M. & Kenneth S. Rogoff, 2011. "Capital Controls: Myth and Reality--A Portfolio Balance Approach," Working Paper Series WP11-7, Peterson Institute for International Economics.
    13. Jose De Gregorio & Sebastian Edwards & Rodrigo O. Valdes, 2000. "Controls on Capital Inflows: Do they Work?," NBER Working Papers 7645, National Bureau of Economic Research, Inc.
    14. Jonathan David Ostry & Atish R. Ghosh & Karl Friedrich Habermeier & Luc Laeven & Marcos Chamon & Mahvash Saeed Qureshi & Annamaria Kokenyne, 2011. "Managing Capital Inflows," IMF Staff Discussion Notes 11/06, International Monetary Fund.
    15. Atish R. Ghosh & Jonathan David Ostry & Charalambos G. Tsangarides, 2011. "Exchange Rate Regimes and the Stability of the International Monetary System," IMF Occasional Papers 270, International Monetary Fund.
    16. Guonan Ma & RobertN McCauley, 2008. "Efficacy Of China'S Capital Controls: Evidence From Price And Flow Data," Pacific Economic Review, Wiley Blackwell, vol. 13(1), pages 104-123, 02.
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    Cited by:
    1. Fratzscher, Marcel, 2012. "Capital controls and foreign exchange policy," CEPR Discussion Papers 8788, C.E.P.R. Discussion Papers.
    2. Kristin J. Forbes & Francis E. Warnock, 2011. "Capital Flow Waves: Surges, Stops, Flight, and Retrenchment," NBER Chapters, in: Global Financial Crisis National Bureau of Economic Research, Inc.
    3. Kristin J. Forbes & Francis E. Warnock, 2012. "Capital Debt -and Equity-Led Capital Flow Episodes," Working Papers Central Bank of Chile 676, Central Bank of Chile.
    4. Bank for International Settlements, 2012. "Challenges related to capital flows: Latin American perspectives," BIS Papers, Bank for International Settlements, number 68, 8.
    5. Charles Engel, 2012. "Capital controls: what have we learned?," BIS Papers chapters, in: Bank for International Settlements (ed.), Challenges related to capital flows: Latin American perspectives, volume 68, pages 22-26 Bank for International Settlements.
    6. Marius del Giudice Rodriguez & Thomas Wu, 2013. "The effect of capital controls and prudential FX measures on options-implied exchange rate stability," Working Paper Series 2013-20, Federal Reserve Bank of San Francisco.
    7. Ding, Ding & Jinjarak, Yothin, 2012. "Development threshold, capital flows, and financial turbulence," The North American Journal of Economics and Finance, Elsevier, vol. 23(3), pages 365-385.
    8. Sylwia Nowak & Sanjaya Panth & Ravi Balakrishnan & Yiqun Wu, 2012. "Surging Capital Flows to Emerging Asia," IMF Working Papers 12/130, International Monetary Fund.
    9. Kristina Spantig, 2012. "International monetary policy spillovers in an asymmetric world monetary system - The United States and China," Global Financial Markets Working Paper Series 2012-33, Friedrich-Schiller-University Jena.
    10. Benjamin Carton, 2011. "The Impossible Trinity Revised: An Application to China," Working Papers 2011-27, CEPII research center.

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