Estimated Policy Rules for Capital Controls

Gurnain Pasricha

No 2020/080, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; capital control; monetary policy; exchange rate; foreign currency; capital controls; macroprudential policy; mercantilist motivations; capital flows; emerging markets; policy rules; mercantilism proxy; mercantilist motivation; inflow control; Fiscal stance; Bank credit; Exchange rates; Foreign currency debt; Global; trade competitor; inflation targeting; inflow side capital control; capital control action; nominal exchange rate; mercantilist concern (search for similar items in EconPapers)
Pages: 60
Date: 2020-06-05
New Economics Papers: this item is included in nep-mon
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Journal Article: Estimated policy rules for capital controls (2022)
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