Working Paper: NBER ID: w20860
Authors: Kristin Forbes; Marcel Fratzscher; Roland Straub
Abstract: Are capital controls and macroprudential measures related to international exposures successful in achieving their objectives? Assessing their effectiveness is complicated by selection bias; 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 related to international transactions from 2009 to 2011 for 60 countries. Results show that these 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 flow management; macroprudential measures; financial stability; exchange rates
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 stability (G28) |
| removal of controls on capital outflows (F32) | real exchange rate depreciation (F31) |
| increased macroprudential measures (E44) | reduced bank credit growth (G21) |
| increased macroprudential measures (E44) | reduced exposure to portfolio liabilities (G11) |
| CFMs (E50) | exchange rates (F31) |
| CFMs (E50) | capital flows (F32) |