Managing the Tide; How Do Emerging Markets Respond to Capital Flows?
Atish Ghosh (),
Jonathan Ostry () and
No 17/69, IMF Working Papers from International Monetary Fund
This paper examines whether—and how—emerging market economies (EMEs) respond to capital flows to mitigate their untoward consequences. Based on a sample of about 50 EMEs over 2005Q1–2013Q4, we find that EME policy makers respond proactively to capital inflows by using a combination of policy tools: central banks raise the policy interest rate to address economic overheating concerns; intervene in the foreign exchange market to resist currency appreciation pressures; tighten macroprudential measures to dampen credit growth; and deploy capital inflow controls in the face of competitiveness and financial-stability concerns. Contrary to conventional policy advice to EMEs, we find no evidence of counter-cyclical fiscal policy in the face of capital inflows. Overall, policies are more likely to respond, and used in combination, during inflow surges than in more normal times.
Keywords: Central banks and their policies; capital flows, policy toolkit, capital controls, emerging market economies, capital flows, policy toolkit, capital controls, emerging market economies (search for similar items in EconPapers)
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