Managing the Tide: How Do Emerging Markets Respond to Capital Flows?

42 Pages Posted: 12 May 2017

See all articles by Atish R. Ghosh

Atish R. Ghosh

International Monetary Fund (IMF) - Policy Development and Review Department

Jonathan D. Ostry

International Monetary Fund (IMF)

Mahvash Saeed Qureshi

International Monetary Fund (IMF) - Research Department

Date Written: March 2017

Abstract

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

Ghosh, Atish R. and Ostry, Jonathan D. and Qureshi, Mahvash Saeed, Managing the Tide: How Do Emerging Markets Respond to Capital Flows? (March 2017). IMF Working Paper No. 17/69. Available at SSRN: https://ssrn.com/abstract=2967424

Atish R. Ghosh (Contact Author)

International Monetary Fund (IMF) - Policy Development and Review Department ( email )

700 19th St. NW
Washington, DC 20431
United States

Jonathan D. Ostry

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Mahvash Saeed Qureshi

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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