Reducing the Volatility of the Exchange Market Pressure in Emerging Economies: The Role of Capital Controls

This study derives an exchange market pressure (EMP) index using a weighted, scaled sum of variables, including exchange rate depreciation, official foreign exchange intervention, and interest rate differentials, for the period 1999-2023. Using the US dollar as a reference currency, it includes various balance of payments components of the EMP to compare and analyse capital flow pressures for emerging economies such as Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Russia, South Africa, and Turkey. The study also analyses the impact of EMP volatility in response to capital inflow and capital outflow controls, utilising EGARCH econometric estimates. Our findings indicate that higher capital controls are generally associated with greater EMP, though the effects differ between inflow and outflow restrictions. We also find that EMP volatility reacts asymmetrically to shocks, with stronger responses to positive developments (‘good news’) than to negative ones (‘bad news’). These results highlight the importance of tailoring capital flow management tools to country-specific vulnerabilities and global financial conditions.