IMF Working Papers

Estimated Policy Rules for Capital Controls

By Gurnain Kaur Pasricha

June 5, 2020

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Gurnain Kaur Pasricha. Estimated Policy Rules for Capital Controls, (USA: International Monetary Fund, 2020) accessed November 21, 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 borrows the tradition of estimating policy reaction functions from monetary policy literature to ask whether capital controls respond to macroprudential or mercantilist motivations. I explore this question using a novel, weekly dataset on capital control actions in 21 emerging economies from 2001 to 2015. I introduce a new proxy for mercantilist motivations: the weighted appreciation of an emerging-market currency against its top five trade competitors. This proxy Granger causes future net initiations of non-tariff barriers in most countries. Emerging markets systematically respond to both mercantilist and macroprudential motivations. Policymakers respond to trade competitiveness concerns by using both instruments—inflow tightening and outflow easing. They use only inflow tightening in response to macroprudential concerns. Policy is acyclical to foreign debt; however, high levels of this debt reduces countercyclicality to mercantilist concerns. Higher exchange rate pass-through to export prices, and having an inflation targeting regime with non-freely floating exchange rates, increase responsiveness to mercantilist concerns.

Subject: Balance of payments, Bank credit, Capital controls, Exchange rates, External debt, Fiscal policy, Fiscal stance, Foreign currency debt, Foreign exchange, Money

Keywords: Bank credit, Capital control, Capital control action, Capital controls, Capital flows, Emerging markets, Exchange rate, Exchange rates, Fiscal stance, Foreign currency, Foreign currency debt, Global, Inflation targeting, Inflow control, Inflow side capital control, Macroprudential policy, Mercantilism proxy, Mercantilist concern, Mercantilist motivation, Mercantilist motivations, Monetary policy, Nominal exchange rate, Policy rules, Trade competitor, WP

Publication Details

  • Pages:

    60

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2020/080

  • Stock No:

    WPIEA2020080

  • ISBN:

    9781513546100

  • ISSN:

    1018-5941

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