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Capital flows liberalisation and macroprudential policies: The effects on credit cycles in emerging economies

Tanja Kuzman, Jelisaveta Lazarevic and Milan Nedeljkovic

Economic Analysis and Policy, 2022, vol. 73, issue C, 602-619

Abstract: This paper studies the conditionality in the relationship between capital flows liberalisation, macroprudential policies, and credit cycles in emerging market (EM) economies. Using quarterly data for 16 EM economies, we document the effectiveness of broad macroprudential measures in containing credit cycles in the EM economies. More importantly and in line with theory, we find that the effect of liberalisation of capital inflows on the excessive credit dynamics is conditional on the stance of the macroprudential regulation. When the macroprudential framework is tight, the liberalisation of capital inflows does not have a statistically significant effect on the excessive credit dynamics. In contrast, in economies with a lax macroprudential framework, the liberalisation of capital inflows may amplify credit expansion. The results provide a rationale to explain often conflicting findings in the earlier empirical literature.

Keywords: Credit cycle; Capital flows; Macroprudential policy; Financial liberalisation; Emerging markets (search for similar items in EconPapers)
JEL-codes: F34 F6 G28 G38 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.eap.2021.12.010

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