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The effectiveness of macroprudential policies in managing extreme capital flow episodes

Author

Listed:
  • David de Villiers

    (Department of Economics, Stellenbosch University)

  • Hylton Hollander

    (Department of Economics, Stellenbosch University)

  • Dawie van Lill

    (Department of Economics, Stellenbosch University)

Abstract

Against the backdrop of a proliferation of policy tools, ongoing policy uncertainty surrounds the suitability of capital flow management in mitigating systemic risk and financial disruptions. We study the effectiveness of macroprudential policies in managing extreme capital flow episodes (surges, stops, flight, and retrenchment), comparing them to capital controls and foreign exchange interventions. Using propensity score matching, based on a panel of 54 countries spanning 1990Q1 to 2020Q3, we find that macroprudential policy can reduce the likelihood of extreme capital flow episodes at least as effectively as capital controls or foreign exchange interventions. Their relative effectiveness, however, varies considerably across type of instrument, proliferation of tools, country income-development level, and type of extreme capital flow episode.

Suggested Citation

  • David de Villiers & Hylton Hollander & Dawie van Lill, 2023. "The effectiveness of macroprudential policies in managing extreme capital flow episodes," Working Papers 06/2023, Stellenbosch University, Department of Economics.
    • Handle: RePEc:sza:wpaper:wpapers382
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    File URL: https://www.ekon.sun.ac.za/wpapers/2023/wp062023/wp062023.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    macroprudential policy; capital controls; foreign exchange interventions; extreme capital flows; financial stability;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G01 - Financial Economics - - General - - - Financial Crises
    • G1 - Financial Economics - - General Financial Markets

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