Capital Flows at Risk: Taming the Ebbs and Flows

IMF Working Papers, December 20, 2019

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Authors: Gaston Gelos, Lucyna Gornicka, Robin Koepke, Ratna Sahay, Silvia Sgherri
Published: December 20, 2019
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9781513522906.001

The volatility of capital flows to emerging markets continues to pose challenges to policymakers.
The paper proposes a new framework to answer policy questions:
- What policies and policy frameworks are most effective in dampening sharp capital flow movements in response to global shocks?
- What are the near- versus medium-term trade-offs of different policies?
The approach uses a quantile regression framework to predict the entire future probability distribution of capital flows to emerging markets, based on current domestic structural characteristics, policies, and global financial conditions.
The framework allows policymakers to quantify capital flows risks and evaluate policy tools to mitigate them, building the foundation of a risk management framework for capital flows.

Quantile regression framework used to predict the entire future probability distribution of capital flows to emerging markets.
Predictors include current domestic structural characteristics, policies, and global financial conditions.

Capital flow volatility to emerging markets remains a central policy challenge.
The framework provides a way to quantify capital flow risks rather than point forecasts.
Emphasis on evaluating policy tools with attention to near-term versus medium-term trade-offs.

Use the probability-distribution forecasts from the quantile regression framework to:
- Quantify capital flow risks.
- Evaluate the effectiveness of policies and policy frameworks for dampening sharp capital flow movements.
- Inform a risk management framework for capital flows that weighs near-term and medium-term trade-offs.

Subject: Balance of payments, Capital account, Capital flow management, Capital flows, Emerging and frontier financial markets, Exchange rate arrangements, Financial markets, Foreign exchange
Keywords: Bbb yield, capital controls, capital flow, Capital flow management, capital flow measure, capital flow risk, capital flow volatility, Capital flows, capital flows data, capital withdrawal, Emerging and frontier financial markets, emerging markets, Exchange rate arrangements, flow risk, flows data, flows to emerging markets, foreign-exchange intervention, FX intervention, Global, macroprudential policies, portfolio, portfolio inflow, risks to capital flow, WP

IMF Working Paper — “Capital Flows at Risk: Taming the Ebbs and Flows”, Working Paper No. 2019/279, December 20, 2019.