Managing the Tide: How Do Emerging Markets Respond to Capital Flows?
42 Pages Posted: 12 May 2017
Date Written: March 2017
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
JEL Classification: E58, F21, F32, G28
Suggested Citation: Suggested Citation