Capital Controls and Macroprudential Measures: What Are They Good For?

56 Pages Posted: 7 Mar 2014

See all articles by Kristin J. Forbes

Kristin J. Forbes

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Roland Straub

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2013

Abstract

Are capital controls and macroprudential measures successful in achieving their objectives? Assessing their effectiveness is complicated by selection bias and endogeneity; countries which change their capital-flow management measures (CFMs) often share specific characteristics and are responding to changes in variables that the CFMs are intended to influence. This paper addresses these challenges by using a propensity-score matching methodology. We also create a new database with detailed information on weekly changes in controls on capital inflows, capital outflows, and macroprudential measures from 2009 to 2011 for 60 countries. Results show that macroprudential measures can significantly reduce some measures of financial fragility. Most CFMs do not significantly affect other key targets, however, such as exchange rates, capital flows, interest-rate differentials, inflation, equity indices, and different volatilities. One exception is that removing controls on capital outflows may reduce real exchange rate appreciation. Therefore, certain CFMs can be effective in accomplishing specific goals — but most popular measures are not “good for” accomplishing their stated aims.

Keywords: capital controls, macroprudential measures, propensity-score matching, selection bias, capital flows, emerging markets

JEL Classification: F3, F4, F5, G0, G1

Suggested Citation

Forbes, Kristin J. and Fratzscher, Marcel and Straub, Roland, Capital Controls and Macroprudential Measures: What Are They Good For? (December 1, 2013). MIT Sloan Research Paper No. 5061-13. Available at SSRN: https://ssrn.com/abstract=2364486 or http://dx.doi.org/10.2139/ssrn.2364486

Kristin J. Forbes (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Room E62-416
Cambridge, MA 02142
United States
617-253-8996 (Phone)

HOME PAGE: http://web.mit.edu/kjforbes/www

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Marcel Fratzscher

DIW Berlin ( email )

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Berlin, 10117
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Roland Straub

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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