Macroprudential Policies and Capital Controls Over Financial Cycles
MacroprudentialPoliciesandCapitalControlsOverFinancialCycles MariaArakelyan,AdamGersl,andMartinSchindler WP/23/171 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 AUG ©2023InternationalMonetaryFundWP/23/171 IMFWorkingPaper InstituteforCapacityDevelopment MacroprudentialPoliciesandCapitalControlsOverFinancialCycles AuthorizedfordistributionbyAliAlichiAugust2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Inthispaperweassesstheeffectivenessofmacroprudentialpoliciesandcapitalcontrolsinsupportingfinancialstability.Weconstructalargeandgranulardatasetonprudentialandcapitalflowmanagementmeasurescovering53countriesduring1996-2016.Conditionalonacreditboom,westudytheimpactofthesepolicymeasuresontheprobabilityofthecreditboomendinginabust.Ouranalysissuggeststhatmacroprudentialtoolsareeffectivefromthisperspective.Ifcreditboomsareaccompaniedbycapitalflowsurges,inadditiontomacroprudentialtools,capitalcontrolsonmoneymarketinstrumentsincludingcross-borderinterbanklendingtendtocontributetoreducingthelikelihoodofacreditbust. RECOMMENDEDCITATION:Arakelyan,M.,Gersl,A.,Schindler,M.(2023).MacroprudentialPoliciesandCapitalControlsOverFinancialCycles.IMFWorkingPaperWP/23/171. JELClassificationNumbers: E51;E58;F38;G28 Keywords: Macroprudentialmeasures;capitalcontrols,financialstability;creditcycles Author’sE-MailAddress: marakelyan@jvi.org,adam.gersl@gmail.com,mschindler@imf.org *MariaArakelyanisEconomistattheJointViennaInstitute,Austria.AdamGerslisanAssociateProfessoratCharlesUniversity,Prague,CzechRepublic.MartinSchindlerisdeputydivisionchiefandmissionchiefintheIMF’sAfricanDepartment.TheauthorswouldliketothankRomainBouis,FrancescoGrigoli,GeoffreyHeenan,ErlendNier,NikhilPatel,andFranciscoRochfortheirhelpfulsuggestionsandcomments.Allremainingerrorsareours. WORKINGPAPERS MacroprudentialPoliciesandCapitalControlsOverFinancialCycles PreparedbyMariaArakelyan,AdamGersl,andMartinSchindler Contents I.Introduction6 II.ReviewofRelatedLiterature8 III.DataConstruction12 Prudentialmeasures12 Capitalcontrols13 Macroeconomicvariables14 IV.MacroprudentialandCapitalControlMeasuresOverTime15 V.IdentifyingCreditandCapitalCycles17 VI.MacroprudentialandCapitalControlMeasuresoverCreditandCapitalCycle20 VII.PolicyEffectivenessDuringCreditBooms23 VIII.PolicyEffectivenessduringCreditBoomswithCapitalSurges27 IX.Conclusion32 References33 Appendix37 FIGURES 1.DynamicsofMacroprudentialPoliciesandCapitalControlMeasures16 2.PolicyTighteningvs.Loosening16 3.ChangeincredittoGDP19 4.CreditandPrivateCapitalFlowCycles20 5.UseofMacroprudentialandCapitalControlMeasuresDuringCreditBooms,1996-201621 6.MacroprudentialPoliciesovertheCycleinAdvancedEconomiesandEmergingMarkets22 7.GoodandBadCreditBooms23 TABLES 1.UseofMacroprudentialPolicybyInstrument,1996-201617 2.UseofCapitalInflowControlsbyInstrument,1996-201617 3.Netpolicytightening:sumovertheboom25 4.Netpolicytightening:meanovertheboom26 5.Netpolicytighteningduringboomswithsurges:sumovertheboom29 6.Netpolicytighteningduringboomswithsurges:meanovertheboom31 A1.Countriesincludedinthesample37 A2.Definitionsofmacroprudentialmeasures38 A3.DatasetonMPMs:Mappingoftoolstosourcedatabases39 A4.DatasetonCCs:Mappingoftoolstosourcedatabases40 A5.Grosspolicytightening:sumovertheboom41 A6.Grosspolicytightening:meanovertheboom42 A7.Netpolicytighteninginstrongbooms:sumoverthecycle43 A8.Netpolicytighteninginstrongbooms:meanoverthecycle44 I.Introduction Theneedtomakethefinancialsystemmoreresilientandtameitsinherentprocyclicalityvis-à-vistherealeconomywasoneofthekeylessonsoftheglobalfinancialcrisis.Inanefforttostrengthenthefinancialsector,manypolicymakershavesinceimplementedanewmacroprudentialpolicyapproachthatencompassestoolstolimitsystemicriskaccumulationandtobuildbuffersinthesystemduringgoodtimestominimizetheimpactoffinancialdownturnsonfinancialinstitutions,andhencetheeconomy,oncethecycleturns(IMF2013).Agrowingbodyofliteratureontheeffectivenessandcalibrationofmacroprudentialtoolshasemerged,contributingtoourunderstandingofhowtobestadjustfinancialsectorpoliciesoverthefinancialcycle. Capitalflowsareoneofthekeydriversoffinancialcycles.Manyepisodesoffinancialupturnswithstrongcreditandassetpricegrowthhavewitnessedcurrentaccountdeteriorationsamidstrongprivatecapitalinflows,especiallywhenintermediatedbythebankingsystem,andtypicallyendinginfinancialbusts(Martinez(2015);Dell’Aricciaetal.(2016)).Policymakershaveoftenappliedvariouscapitalflowmanagementmeasures(CFM),referredtoalsoascapitalcontrols,toregulateextremelylargeinflows(capitalsurges)withtheaimtopreventapossibleoverheatingoftheeconomyandtoavoidanundueaccumulationofvulnerabilitiesi
