Prudential measures in dealing with capital flows – case of Poland

In the run up to the financial crisis of 2007-2009 many emerging market economies, including Poland, were affected by considerable inflows of capital – capital that their financial systems found difficult to absorb. One of a number of policy options to respond to such inflows are currency-based measures (CBMs) directed at banks that are, in principle, motivated by (macro-)prudential concerns. These measures are bank regulations that apply a discrimination on the basis of the currency of an operation, typically foreign currencies. This paper presents and analyses a dataset of CBMs directed at banks in Poland between 2005 and 2013. We denote the motivations for imposing CBMs and assess their effectiveness by measuring their impact on capital flows. We find that there is evidence of negative impact of CBMs on capital inflows in the first quarter after the measure starts to be in effect. It means that actions have targeted capital inflows – despite the declared (macro-)prudential purpose of the measures. However, we also find that the model implies a stronger effect when the variable of unweighted CBMs is used. Moreover, the model implies a strong relationship between capital inflows and the exchange rate. However, we do not find the impact of CBMs on the exchange rate.