The effectiveness of macroprudential policies in managing extreme capital flow episodes

Stellenbosch Working Paper Series No. WP06/2023
 
Publication date: December 2023
 
Author(s):
[protected email address] (Department of Economics, Stellenbosch University)
[protected email address] (Department of Economics, Stellenbosch University)
[protected email address] (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.

 
JEL Classification:

E58, F3, F4, G01, G1

Keywords:

macroprudential policy, capital controls, foreign exchange interventions, extreme capital flows, financial stability

Download: PDF (1.5 MB)

Login

(for staff & registered students)



Need a password?
Forgot your password?

BER Weekly

13 Jun 2025 Another global flashpoint ignites as Israel attacks Iran’s nuclear facilities
The story for the week was initially relatively positive, with the overarching narrative being that the US and China agreed on a trade truce. However, overnight, Israel struck Iran’s nuclear facilities, military sites and killed senior commanders in dozens of strikes. While Israel has attacked Iran before, this is the first time nuclear facilities were...

Read the full issue
 

BER Weekly

13 Jun 2025 Another global flashpoint ignites as Israel attacks Iran’s nuclear facilities
The story for the week was initially relatively positive, with the overarching narrative being that the US and China agreed on a trade truce. However, overnight, Israel struck Iran’s nuclear facilities, military sites and killed senior commanders in dozens of strikes. While Israel has attacked Iran before, this is the first time nuclear facilities were...

Read the full issue