Macroeconomic stability or financial stability: How are capital controls used? Insights from a new database

Mitali Das and Hailey Ordal

Journal of Financial Stability, 2022, vol. 63, issue C

Abstract: While the traditional objectives of capital controls were to address macroeconomic stability risks, a new “externalities view” has emerged prescribing their use to contain financial stability risks. In this context, our understanding of whether capital controls are used in practice to mitigate macroeconomic or financial stability remains limited. Using a novel database on high-frequency capital account regulations for 47 advanced and emerging economies from 2008 to 2020, this paper empirically assesses this question. Our main findings are that: (a) in emerging markets there is a strong association of capital controls on inflows to mitigate risks to macro stability but not financial stability risks; (b) in advanced economies there is a robust association between capital controls on inflows to lean against the buildup of financial stability but not macro stability risks; (c) banking sector flows, but not aggregate capital flows, are strongly associated with tightening capital controls on inflows in emerging markets; and (d) pooling advanced and emerging economies attenuates regression estimates and would lead to concluding that capital controls have weak association with both financial and macro stability motives. Our results can be rationalized by the greater capital flows, more volatile business cycles and stronger interaction between business and financial cycles in emerging markets, and the deeper asset markets found in advanced economies.

Keywords: Financial stability risks; Macroeconomic stabilization; Capital controls; Capital flow management measures; Business cycles; Financial cycles (search for similar items in EconPapers)
JEL-codes: F3 F31 F41 F44 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:63:y:2022:i:c:s1572308922000882

DOI: 10.1016/j.jfs.2022.101067

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