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The effects of Monetary Policy on Capital Flows A Meta-Analysis

Author

Listed:
  • Mauricio Villamizar-Villegas
  • Lucía Arango-Lozano
  • Geraldine Castelblanco
  • Nicolás Fajardo-Baquero
  • Maria A. Ruiz-Sanchez

Abstract

We investigate whether central banks are able to attract or redirect capital flows, by bringing together the entire empirical literature into the first quantitative meta-analysis on the subject. We dissect policy effects by the type of flow and by the origin of the monetary shock. Further, we assess whether policy effects depend on factors that drive investors to either search for yields or fly to safety. Our findings indicate a mean effect size of inflows in the amount of 0.09% of quarterly GDP in response to either a 100 basis point (bp) increase in the domestic policy rate or a 100bp reduction in the external rate. However, the effect size under a random effect specification is much lower (0.01%). Factors that significantly attract inflows include foreign exchange reserves, output growth, and financial openness, while factors that deter flows include foreign debt, capital controls, and departures from the uncovered interest rate parity. Also, both local and global risks matter (global risks exerting a larger pressure). Finally, we shed light on differences across the different types of flows: banking flows being the most responsive to monetary policy, while foreign direct investment being the least responsive. **** RESUMEN: Este trabajo representa el primer metanálisis cuantitativo sobre si los bancos centrales son capaces de atraer o redirigir los flujos de capital. Se analizan los efectos por tipo de flujo y por el origen del choque monetario. Además, se evalúa si los efectos de las políticas dependen de factores que impulsan a que inversionistas extranjeros busquen rendimientos o, por el contrario, busquen refugio. Nuestros hallazgos indican que, en promedio, el tamaño de las entradas de capital es de 0,09% del PIB trimestral en respuesta a un choque de 100 puntos básicos, ya sea en aumentos de la tasa de política doméstica o en reducciones de la tasa de política externa. Sin embargo, bajo una especificación de efectos aleatorios el tamaño del efecto es mucho menor (0,01%). Los factores que atraen significativamente flujos de capital incluyen el nivel de reservas internacionales, el crecimiento de la producción y el grado de apertura financiera, mientras que los factores que disuaden los flujos incluyen la deuda fiscal, controles de capital y desviaciones de la paridad descubierta de la tasa de interés. También, tanto los riesgos locales como los globales importan (aunque los riesgos globales ejercen una mayor presión). Finalmente, brindamos luces sobre las diferencias entre los tipos de flujos: los flujos bancarios siendo los más reactivos a la política monetaria, y los de inversión extranjera directa los menos reactivos.

Suggested Citation

  • Mauricio Villamizar-Villegas & Lucía Arango-Lozano & Geraldine Castelblanco & Nicolás Fajardo-Baquero & Maria A. Ruiz-Sanchez, 2022. "The effects of Monetary Policy on Capital Flows A Meta-Analysis," Borradores de Economia 1204, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:1204
    DOI: 10.32468/be.1204
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    More about this item

    Keywords

    Meta-Analysis; Capital Flows; Monetary Policy; Meta-Análisis; Flujos de Capital; Política Monetaria;
    All these keywords.

    JEL classification:

    • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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