The effectiveness of macroprudential policies in managing extreme capital flow episodes

David De Villiers (), Hylton Hollander and Dawie Van Lill ()
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David De Villiers: Department of Economics, Stellenbosch University
Dawie Van Lill: Department of Economics, Stellenbosch University

No 06/2023, Working Papers from Stellenbosch University, Department of Economics

Abstract: Against the backdrop of a proliferation of policy tools, ongoing policy uncertainty surrounds the suitability of capital flow management in mitigating systemic risk and financial disruptions. We study the effectiveness of macroprudential policies in managing extreme capital flow episodes (surges, stops, flight, and retrenchment), comparing them to capital controls and foreign exchange interventions. Using propensity score matching, based on a panel of 54 countries spanning 1990Q1 to 2020Q3, we find that macroprudential policy can reduce the likelihood of extreme capital flow episodes at least as effectively as capital controls or foreign exchange interventions. Their relative effectiveness, however, varies considerably across type of instrument, proliferation of tools, country income-development level, and type of extreme capital flow episode.

Keywords: macroprudential policy; capital controls; foreign exchange interventions; extreme capital flows; financial stability (search for similar items in EconPapers)
JEL-codes: E58 F3 F4 G01 G1 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-ifn, nep-mon and nep-opm
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https://www.ekon.sun.ac.za/wpapers/2023/wp062023/wp062023.pdf First version, 2023 (application/pdf)

Related works:
Journal Article: The effectiveness of macroprudential policies in managing extreme capital flow episodes (2024)
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