Macroprudential Policies and Capital Controls Over Financial Cycles

IMF Working Papers, August 25, 2023

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The paper assesses the effectiveness of macroprudential policies and capital controls in supporting financial stability.
A large and granular dataset on prudential and capital flow management measures covering 53 countries during 1996-2016 is constructed.
Conditional on a credit boom, the study investigates the impact of these policy measures on the probability that the credit boom ends in a bust.
Main conclusion: macroprudential tools are effective from this perspective. If credit booms are accompanied by capital flow surges, in addition to macroprudential tools, capital controls on money market instruments including cross-border interbank lending tend to contribute to reducing the likelihood of a credit bust.

Dataset: prudential and capital flow management measures, 53 countries, 1996-2016.
Analytical focus: episodes conditional on a credit boom and probability of transition to a credit bust.
Policy instrument detail: macroprudential tools and capital controls on money market instruments, including cross-border interbank lending.

Macroprudential tools reduce the probability that a credit boom ends in a bust.
When credit booms coincide with capital flow surges, capital controls targeting money market instruments (including cross-border interbank lending), in addition to macroprudential measures, tend to lower the likelihood of a credit bust.

Deploy macroprudential tools to mitigate the risk that credit booms culminate in credit busts.
Consider capital controls on money market instruments, including cross-border interbank lending, as complementary measures when credit booms are accompanied by capital flow surges.