Working Paper: NBER ID: w17363
Authors: Mahvash S. Qureshi; Jonathan D. Ostry; Atish R. Ghosh; Marcos Chamon
Abstract: We examine whether macroprudential policies and capital controls can contribute to enhancing financial stability in the face of large capital inflows. We construct new indices of foreign currency (FX)-related prudential measures, domestic prudential measures, and financial-sector capital controls for 51 emerging market economies over the period 1995-2008. Our results indicate that both capital controls and FX-related prudential measures are associated with a lower proportion of FX lending in total domestic bank credit and a lower proportion of portfolio debt in total external liabilities. Other prudential policies appear to help restrain the intensity of aggregate credit booms. Experience from the global financial crisis suggests that prudential and capital control policies in place during the boom seem to have enhanced economic resilience during the bust.
Keywords: capital controls; macroprudential policies; financial stability; emerging markets
JEL Codes: F21; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Capital controls (F38) | Lower share of foreign currency lending in total domestic bank credit (F65) |
| Foreign currency-related prudential measures (F31) | Lower share of foreign currency lending in total domestic bank credit (F65) |
| Other prudential regulations (G28) | Smaller aggregate credit booms (E51) |
| Countries maintaining capital controls prior to the crisis (F38) | Greater resilience during downturns (E32) |
| Moving from the 25th to the 75th percentile of capital controls restrictiveness (F38) | Lower share of foreign currency loans (F65) |