Working Paper: CEPR ID: DP15842
Authors: Gaston Gelos; Lucyna Gornicka; Robin Koepke; Ratna Sahay; Silvia Sgherri
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.
Keywords: capital flows; macroprudential policies; foreign-exchange intervention; capital controls; emerging markets
JEL Codes: F32; F38; E52; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| more flexible exchange rate regimes (F33) | higher risks of large inflows and outflows (F65) |
| more flexible exchange rate regimes (F33) | larger rebound of flows in the medium term (F32) |
| foreign exchange interventions (F31) | mitigate downside risks to portfolio inflows in the short term (F32) |
| foreign exchange interventions (F31) | limited effects in the medium term (F69) |
| tightening capital flow measures (F32) | exacerbate risk of large outflows in the short term (F65) |
| monetary policy (E52) | little evidence of effectiveness in shielding countries from capital outflows driven by global shocks (F32) |
| macroprudential policies (E60) | sizeable beneficial effects in both the short and medium term (E65) |