Recent advances in the literature on capital flow management

Roland Beck, Juan Carlos Berganza, Axel Brüggemann, Rafael Cezar, Carlijn Eijking, Markus Eller, Alberto Fuentes, Joel Graça Alves, Lilian Kreitz, Clement Marsilli, Isabella Moder, Luis Molina Sánchez, Alain Naef, Valerio Nispi Landi, Beatrice Scheubel, Anastasia Theofilakou, Floriane Van Den Hove and Grzegorz Wesołowski

No 317, Occasional Paper Series from European Central Bank

Abstract: Large swings in cross-border capital flows can have consequences for domestic stability and open a channel for the transmission of shocks and spillovers across economies, including the euro area. Against this backdrop, the present paper reviews new evidence for the effectiveness of capital flow management policies in achieving macroeconomic and financial stability. Particular attention is paid to literature that has been used by the International Monetary Fund (IMF) to underpin its so-called Integrated Policy Framework, in which the roles of monetary, exchange rate, macroprudential and capital flow management policies are considered jointly. The literature published since the global financial crisis continues to affirm the effectiveness of capital flow management measures (CFMs) in addressing financial stability risks resulting from capital flow reversals; at the same time, however, it also continues to underscore that such policies should not substitute for warranted economic adjustments and structural reforms. Even so, recent literature also provides a case for considering, under certain circumstances, “precautionary” CFMs which could be applied to capital inflows to prevent a boom-and-bust cycle from being set in motion. This paper also highlights the need for further work on the long-term effects of such precautionary instruments, as well as their joint use with monetary policy instruments. Regarding capital flow management policies within the domain of central banks, the literature points to the usefulness of foreign exchange interventions (FXIs) in mitigating financial stability risks in countries with specific characteristics such as currency mismatches, borrowing constraints and shallow foreign exchange markets that are common to emerging market and developing economies alike. However, the literature also warns that such measures may reduce economic agents’ incentives to hedge against currency risks, with the result that unfavourable initial conditions beco JEL Classification: F32, F38

Keywords: capital controls; short-term capital movements (search for similar items in EconPapers)
Date: 2023-09
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
Note: 597822
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbops:2023317

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