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Financial cycles and domestic policy choices

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  • Loipersberger, Florian
  • Matschke, Johannes

Abstract

The global financial cycle has raised concerns about the ability of emerging markets to insulate their economy from international spillovers. Using dynamic Local Projections we show that capital controls are as potent as floating exchange rates in dampening the response of international financial shocks on domestic financial variables and the real economy. We relate this finding to muted boom–bust cycles in short-term non-resident capital flows. However, the benefits of floats or capital controls are reaped in isolation, that is, either tool is enough. We attribute this pattern to nominal frictions in domestic labor markets.

Suggested Citation

  • Loipersberger, Florian & Matschke, Johannes, 2022. "Financial cycles and domestic policy choices," European Economic Review, Elsevier, vol. 143(C).
  • Handle: RePEc:eee:eecrev:v:143:y:2022:i:c:s0014292122000046
    DOI: 10.1016/j.euroecorev.2022.104034
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    More about this item

    Keywords

    Capital controls; Exchange rates; Financial spillovers;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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