## Preemptive Policies and Risk-Off Shocks in Emerging Markets

_IMF Working Papers, January 7, 2022_

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## Bibliographic details
- Authors: Mitali Das, Gita Gopinath, Sebnem Kalemli-Ozcan
- Published: January 7, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781616358341.001

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### Key findings
- Preemptive capital flow management measures (CFM) can reduce emerging markets and developing countries’ (EMDE) external finance premia during risk-off shocks, especially for vulnerable countries.
- Countries with preemptive policies in place during the five year window before risk-off shocks experienced relatively lower external finance premia and exchange rate volatility during the shock compared to countries which did not have such preemptive policies in place.
- By reducing the impact of risk-off shocks on countries’ funding costs and exchange rate volatility, preemptive policies enable countries’ continued access to international capital markets during troubled times.
- The analysis uses the episodes of Taper Tantrum and COVID-19 as risk-off shocks.

### Data, scope, and numeric facts
- Sample: panel dataset of 56 EMDEs.
- Time period: 1996–2020 at monthly frequency.
- Preemptive policy window: five year window before risk-off shocks.
- Pages: 54
- Volume: 2022
- Issue: 003
- Series: Working Paper No. 2022/003
- DOI: https://doi.org/10.5089/9781616358341.001
- Stock No: WPIEA2022003
- ISBN: 9781616358341
- ISSN: 1018-5941

### Methodology
- Identification strategy: difference-in-differences methodology with country fixed effects.
- Key identification feature: preemptive policies are ex-ante by construction and cannot be put in place as a response to the shock ex-post.
- Controls included: other policies such as monetary policy, foreign exchange interventions (FXI), easing of inflow CFMs, and tightening of outflow CFMs that are used in response to the risk-off shocks.

### Subject coverage and keywords
- Subject: Balance of payments, Capital flow management, Capital inflows, Financial sector policy and analysis, Financial services, Foreign exchange, Interest rate parity, Macroprudential policy instruments
- Keywords: Africa, Capital flow management, Capital inflows, exchange rate volatility, external finance premia, FX debt, Global, Interest rate parity, Macroprudential policy instruments, MPM policy, Preemptive policies, risk-off shock, Risk-Off shock, risk-off shocks, UIP

### Policy implications and interpretation
- Preemptive CFMs can act as insurance against spikes in external finance premia and exchange rate volatility during global risk-off episodes.
- Vulnerable EMDEs stand to gain more from preemptive adoption of CFMs, as these measures are associated with relatively better outcomes during shocks.
- Policy evaluation should account for interactions with contemporaneous responses such as FXI, monetary policy adjustments, and targeted adjustments to inflow and outflow CFMs.

*Preemptive Policies and Risk-Off Shocks in Emerging Markets — Mitali Das, Gita Gopinath, Sebnem Kalemli-Ozcan*

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_Source: https://www.imf.org/en/publications/wp/issues/2022/01/07/preemptive-policies-and-risk-off-shocks-in-emerging-markets-511619_