{
  "title": "All Hands on Deck: Confronting the Challenges of Capital Flows",
  "publication": "IMF Blog, August 2, 2017",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2017/08/02/all-hands-on-deck-confronting-the-challenges-of-capital-flows",
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  "summary": "Authors: Atish Rex Ghosh, Jonathan D. Ostry, Mahvash S. Qureshi.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Authors: Atish Rex Ghosh, Jonathan D. Ostry, Mahvash S. Qureshi.\n- Date: August 2, 2017.\n- Data: Quarterly data over 2005–13.\n- Central question: Do emerging market economies adopt a proactive approach in practice to manage capital inflows and avoid crises when flows recede?"
    },
    {
      "heading": "Menu of policies",
      "content": "- Five policy tools available to emerging market policymakers:\n  - Monetary policy.\n  - Fiscal policy.\n  - Exchange rate policy (including foreign exchange intervention).\n  - Macro-prudential measures (examples: reserve requirements, capital adequacy ratios, dynamic loan loss provisioning).\n  - Capital controls (on inflows and outflows).\n- Mapping of instruments to risks:\n  - Monetary and fiscal policies address inflation and economic overheating.\n  - Foreign exchange intervention limits currency appreciation that threatens competitiveness when the currency is not undervalued.\n  - Macroprudential measures curb excessive credit growth and related financial stability risks.\n  - Capital inflow controls limit volume of inflows or tilt composition toward less risky liabilities.\n  - Capital outflow controls can be relaxed to lower net flows and reduce overheating and appreciation pressures."
    },
    {
      "heading": "Proactive central bank response",
      "content": "- Finding: Emerging markets’ central banks respond to capital flow volatility rather than remain indifferent.\n- Foreign exchange intervention:\n  - Reserve accumulation strongly corresponds to net inflows.\n  - On average, emerging markets’ central banks purchase some 30–40 percent of the inflow.\n  - Heavier intervention observed in some Asian and Latin American economies (examples: India, Indonesia, Malaysia, Brazil, Peru).\n  - Lower intervention observed in others (examples: Mexico, South Africa).\n- Monetary policy:\n  - Capital inflows elicit higher policy rates on average.\n  - The monetary response depends on inflation, the output gap, and the real exchange rate.\n  - Policy rates are raised in response to higher inflation or a larger output gap (counter-cyclical stance).\n  - Policy rates are lowered in response to real exchange rate appreciation."
    },
    {
      "heading": "Procyclical fiscal policy",
      "content": "- Finding: Fiscal policy stance is strongly procyclical in the face of capital inflows.\n- Observed behavior:\n  - Government consumption expenditure rises as capital inflows surge.\n  - Government consumption expenditure falls as capital inflows decrease.\n- Possible explanations:\n  - Political economy constraints.\n  - Difficulty accessing international credit markets in bad times."
    },
    {
      "heading": "Less orthodox policies (macroprudential measures and capital controls)",
      "content": "- General pattern:\n  - Macroprudential measures and capital controls on inflows are generally tightened as inflows surge and relaxed when flows recede.\n- Cross-country variation:\n  - Countries that tend to tighten these measures more often include Brazil, Korea, Turkey.\n- Capital outflow controls:\n  - These measures are relaxed when inflows surge, but primarily in countries without fully open capital accounts (examples: India, South Africa)."
    },
    {
      "heading": "Natural mapping between risks and instruments",
      "content": "- Observed correspondences:\n  - Foreign exchange intervention is generally used when the real effective exchange rate is appreciating.\n  - Monetary policy tightening is driven more by the output gap.\n  - Macroprudential measures are deployed in response to rapid domestic credit growth.\n  - Inflow controls are tightened when both credit growth and currency appreciation are concerns."
    },
    {
      "heading": "Bottom line and open questions",
      "content": "- Summary findings:\n  - Many emerging markets have internalized the need to manage capital flows to benefit from financial globalization while minimizing risks.\n  - Emerging markets typically deploy a combination of instruments, with some correspondence between the nature of the risk and the tool deployed.\n  - Important differences in policy response persist across countries, even in similar macroeconomic circumstances.\n- Implication: Structural characteristics and political economy considerations likely shape country-specific policy responses.\n- Open research question: Whether active policy management by emerging economies has contributed to fewer financial crises in recent years remains to be determined; future research is needed.\n\nSource: All Hands on Deck: Confronting the Challenges of Capital Flows, Atish Rex Ghosh, Jonathan D. Ostry, Mahvash S. Qureshi, August 2, 2017.\n\n---\n\n\n References\n\n- recent research\n- https://www.imf.org/wp-content/uploads/2017/07/ENGJul19capitalflows1.jpg\n- https://www.imf.org/wp-content/uploads/2017/07/ENGJul19capitalflows2.jpg\n\nSource: https://www.imf.org/en/blogs/articles/2017/08/02/all-hands-on-deck-confronting-the-challenges-of-capital-flows"
    }
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    "Authors: Atish Rex Ghosh, Jonathan D Ostry, Mahvash S Qureshi",
    "Published: August 2, 2017",
    "Authors: Atish Rex Ghosh, Jonathan D. Ostry, Mahvash S. Qureshi.",
    "Date: August 2, 2017.",
    "Data: Quarterly data over 2005–13.",
    "Central question: Do emerging market economies adopt a proactive approach in practice to manage capital inflows and avoid crises when flows recede?",
    "Five policy tools available to emerging market policymakers:",
    "Mapping of instruments to risks:",
    "Finding: Emerging markets’ central banks respond to capital flow volatility rather than remain indifferent.",
    "Foreign exchange intervention:",
    "Monetary policy:",
    "Finding: Fiscal policy stance is strongly procyclical in the face of capital inflows.",
    "Observed behavior:",
    "Possible explanations:",
    "General pattern:",
    "Cross-country variation:",
    "Capital outflow controls:",
    "Observed correspondences:",
    "Summary findings:",
    "Implication: Structural characteristics and political economy considerations likely shape country-specific policy responses.",
    "Open research question: Whether active policy management by emerging economies has contributed to fewer financial crises in recent years remains to be determined; future research is needed.",
    "[recent research](https://www.imf.org/en/Publications/WP/Issues/2017/03/27/Managing-the-Tide-How-Do-Emerging-Markets-Respond-to-Capital-Flows-44766)",
    "[https://www.imf.org/wp-content/uploads/2017/07/ENG_Jul_19_capital_flows_1.jpg](https://www.imf.org/wp-content/uploads/2017/07/ENG_Jul_19_capital_flows_1.jpg)",
    "[https://www.imf.org/wp-content/uploads/2017/07/ENG_Jul_19_capital_flows_2.jpg](https://www.imf.org/wp-content/uploads/2017/07/ENG_Jul_19_capital_flows_2.jpg)"
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