The Dilemma and International Macroprudential Policy : Is Capital Flow Management Effective?

This paper provides empirical evidence that emerging market economies adjust capital flow management in response to U.S. monetary policy shocks. Using these shocks as exogenous instruments, we find that such adjustments cause changes to portfolio capital flows — in particular, a one standard deviation increase in the net number of inflow reducing measures reduces net portfolio inflows by two-fifths of a standard deviation. These findings provide support to the “Dilemma” literature, which recommends emerging market economies use capital controls and other macroprudential policies to shield their financial markets and monetary policy autonomy from large and volatile flows brought about by global financial cycles