Working Paper: CEPR ID: DP9798
Authors: Kristin Forbes; Marcel Fratzscher; Roland Straub
Abstract: Are capital controls and macroprudential measures successful in achieving their objectives? Assessing their effectiveness is complicated by selection bias and endogeneity; countries which change their capital-flow management measures (CFMs) often share specific characteristics and are responding to changes in variables that the CFMs are intended to influence. This paper addresses these challenges by using a propensity-score matching methodology. We also create a new database with detailed information on weekly changes in controls on capital inflows, capital outflows, and macroprudential measures from 2009 to 2011 for 60 countries. Results show that macroprudential measures can significantly reduce some measures of financial fragility. Most CFMs do not significantly affect other key targets, however, such as exchange rates, capital flows, interest-rate differentials, inflation, equity indices, and different volatilities. One exception is that removing controls on capital outflows may reduce real exchange rate appreciation. Therefore, certain CFMs can be effective in accomplishing specific goals?but most popular measures are not ?good for? accomplishing their stated aims.
Keywords: capital controls; capital flows; emerging markets; macroprudential measures; propensity score matching; selection bias
JEL Codes: F3; F4; F5; G0; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Macroprudential measures (E44) | financial fragility (bank leverage and inflation expectations) (F65) |
| Most CFMs (E17) | exchange rates, capital flows, and interest rate differentials (F32) |
| Removal of controls on capital outflows (F32) | reduction in real exchange rate appreciation (F31) |
| Increased macroprudential regulations (G28) | bank credit growth and exposure to portfolio liabilities (F65) |
| Increased macroprudential regulations (G28) | portfolio liabilities (G19) |
| Changes in CFMs (E50) | aggregate portfolio flows or nominal exchange rates (F31) |
| Outflow controls (F38) | depreciation of the real exchange rate (F31) |