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Capital Flows at Risk: Taming the Ebbs and Flows

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  • Gelos, Gaston
  • Gornicka, Lucyna
  • Koepke, Robin
  • Sahay, Ratna
  • Sgherri, Silvia

Abstract

The volatility of capital flows to emerging markets continues to pose challenges to policymakers. In this paper, we propose a new quantile regression framework to predict the entire future probability distribution of capital flows to emerging markets, based on changes in global financial conditions, domestic structural characteristics, and policies. The approach allows us to differentiate between short- and medium-term effects. We find that FX- and macroprudential interventions are effective in mitigating downside risks to portfolio flows stemming from adverse global shocks, while tightening of capital controls in response appears to be counterproductive. Good institutional frameworks are not able to shield countries from the increased volatility of portfolio flows in the immediate aftermath of global shocks. However, they do contribute to a more rapid bounce-back of foreign flows over the medium term.

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  • Gelos, Gaston & Gornicka, Lucyna & Koepke, Robin & Sahay, Ratna & Sgherri, Silvia, 2021. "Capital Flows at Risk: Taming the Ebbs and Flows," CEPR Discussion Papers 15842, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:15842
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    Cited by:

    1. Marco A. Hernández Vega, 2021. "The Nonlinear Effect of Uncertainty in Portfolio Flows to Mexico," Working Papers 2021-11, Banco de México.
    2. Forbes, Kristin J. & Warnock, Francis E., 2021. "Capital flow waves—or ripples? Extreme capital flow movements since the crisis," Journal of International Money and Finance, Elsevier, vol. 116(C).
    3. Nicolás Álvarez & Antonio Fernandois & Andrés Sagner, 2021. "Economic Growth at Risk: An Application to Chile," Working Papers Central Bank of Chile 905, Central Bank of Chile.
    4. Kristin J. Forbes, 2020. "The International Aspects of Macroprudential Policy," NBER Working Papers 27698, National Bureau of Economic Research, Inc.
    5. Anusha Chari & Karlye Dilts Stedman & Christian T. Lundblad, 2020. "Capital Flows in Risky Times: Risk-On / Risk-Off and Emerging Market Tail Risk," Research Working Paper RWP 20-08, Federal Reserve Bank of Kansas City.
    6. Eguren-Martin, Fernando & O'Neill, Cian & Sokol, Andrej & von dem Berge, Lukas, 2020. "Capital flows-at-risk: push, pull and the role of policy," Bank of England working papers 881, Bank of England.
    7. Rob Hayward & Andros Gregoriou, 2021. "International Capital Flows and Speculation," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 14(5), pages 1-12, April.
    8. Yoshihiko Norimasa & Kazuki Ueda & Tomohiro Watanabe, 2021. "Emerging Economies' Vulnerability to Changes in Capital Flows: The Role of Global and Local Factors," Bank of Japan Working Paper Series 21-E-5, Bank of Japan.
    9. Mr. Kenji Moriyama & Mr. Nathan Porter & Ms. Celine Rochon & Ran Bi & Jeta Menkulasi & Mr. Jiaqian Chen & Mr. Camilo E Tovar Mora & Ms. Aleksandra Zdzienicka & Ms. Ghada Fayad & Mr. Itai Agur & Mr. Zh, 2020. "Managing External Volatility: Policy Frameworks in Non-Reserve Issuing Economies," IMF Working Papers 2020/288, International Monetary Fund.
    10. Hans Genberg & Özer Karagedikli, 2021. "Machine Learning and Central Banks: Ready for Prime Time?," Working Papers wp43, South East Asian Central Banks (SEACEN) Research and Training Centre.

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    More about this item

    Keywords

    capital controls; Capital Flows; emerging markets; foreign-exchange intervention; macroprudential policies;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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