Policy Rules for Capital Controls

Gurnain Pasricha

Staff Working Papers from Bank of Canada

Abstract: This paper attempts to borrow the tradition of estimating policy reaction functions in monetary policy literature and apply it to capital controls policy literature. Using a novel weekly dataset on capital controls policy actions in 21 emerging economies over the period 1 January 2001 to 31 December 2015, I examine the mercantilist and macroprudential motivations for capital control policies. I introduce a new proxy for mercantilist motivations: the weighted appreciation of an emerging-market currency against its top five trade competitors. There is clear evidence that past emerging-market policy systematically responds to both mercantilist and macroprudential motivations. The choice of instruments is also systematic: policy-makers respond to mercantilist concerns by using both instruments — inflow tightening and outflow easing. They use only inflow tightening in response to macroprudential concerns. I also find that policy is acyclical to foreign debt but is countercyclical to domestic bank credit to the private non-financial sector. The adoption of explicit financial stability mandates by central banks or the creation of inter-agency financial stability councils increased the weight of macroprudential factors in the use of capital controls policies. Countries with higher exchange rate pass-through to export prices are more responsive to mercantilist concerns.

Keywords: Exchange rate regimes; Financial stability; Financial system regulation and policies; International topics (search for similar items in EconPapers)
JEL-codes: F3 F4 F5 G0 G1 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2017
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Working Paper: Policy Rules for Capital Controls (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:17-42

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