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Financial cycles and domestic policy choices

Florian Loipersberger and Johannes Matschke

European Economic Review, 2022, vol. 143, issue C

Abstract: The global financial cycle has raised concerns about the ability of emerging markets to insulate their economy from international spillovers. Using dynamic Local Projections we show that capital controls are as potent as floating exchange rates in dampening the response of international financial shocks on domestic financial variables and the real economy. We relate this finding to muted boom–bust cycles in short-term non-resident capital flows. However, the benefits of floats or capital controls are reaped in isolation, that is, either tool is enough. We attribute this pattern to nominal frictions in domestic labor markets.

Keywords: Capital controls; Exchange rates; Financial spillovers (search for similar items in EconPapers)
JEL-codes: F31 F36 F38 F41 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.euroecorev.2022.104034

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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