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The effectiveness of macroprudential policies and capital controls against volatile capital inflows

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Listed:
  • Jon Frost
  • Hiro Ito
  • René van Stralen

Abstract

This paper compares the effectiveness of macroprudential policies (MaPs) and capital controls (CCs) in influencing the volume and composition of capital inflows, and the probability of banking and currency crises. We distinguish between foreign exchange (FX)-based MaPs, which may be similar to some types of CCs, and non-FX-based MaPs. Using a panel of 83 countries over the period 2000-17, and a propensity score matching model to control for selection bias, we find that capital inflow volumes are lower where FX-based MaPs have been activated. The imposition of CCs does not have a significant effect on the volume or composition of capital inflows. Further, we find that the activation of MaPs is associated with a lower probability of banking crises and surges in capital inflows in the following three years.

Suggested Citation

  • Jon Frost & Hiro Ito & René van Stralen, 2020. "The effectiveness of macroprudential policies and capital controls against volatile capital inflows," Working Papers 686, DNB.
    • Handle: RePEc:dnb:dnbwpp:686
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    References listed on IDEAS

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    JEL classification:

    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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