Managing the Tide: How Do Emerging Markets Respond to Capital Flows?

By Atish R. Ghosh, Jonathan David Ostry, Mahvash S Qureshi

March 27, 2017

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Format: Chicago

Atish R. Ghosh, Jonathan David Ostry, and Mahvash S Qureshi. Managing the Tide: How Do Emerging Markets Respond to Capital Flows?, (USA: International Monetary Fund, 2017) accessed November 5, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper examines whether—and how—emerging market economies (EMEs) respond to capital flows to mitigate their untoward consequences. Based on a sample of about 50 EMEs over 2005Q1–2013Q4, we find that EME policy makers respond proactively to capital inflows by using a combination of policy tools: central banks raise the policy interest rate to address economic overheating concerns; intervene in the foreign exchange market to resist currency appreciation pressures; tighten macroprudential measures to dampen credit growth; and deploy capital inflow controls in the face of competitiveness and financial-stability concerns. Contrary to conventional policy advice to EMEs, we find no evidence of counter-cyclical fiscal policy in the face of capital inflows. Overall, policies are more likely to respond, and used in combination, during inflow surges than in more normal times.

Subject: Balance of payments, Capital controls, Capital flows, Capital inflows, Central bank policy rate, Financial services, Foreign exchange, Output gap, Production

Keywords: Capital control, Capital controls, Capital flow, Capital flows, Capital inflows, Central bank policy rate, Emerging market economies, Exchange rate, FX intervention, Global, Inflow control, Outflow control, Output gap, Policy toolkit, Prudential measure, WP

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/069
Stock No:

WPIEA2017069
ISBN:

9781475589207
ISSN:

1018-5941

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