nep-ifn New Economics Papers
on International Finance
Issue of 2015‒09‒18
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Domestic and multilateral effects of capital controls in emerging markets By Bijsterbosch, Martin; Falagiarda, Matteo; Pasricha, Gurnain; Aizenman, Joshua
  2. An alternative view of exchange market pressure episodes in emerging Europe: an analysis using Extreme Value Theory (EVT) By Heinz, Frigyes Ferdinand; Rusinova, Desislava

  1. By: Bijsterbosch, Martin; Falagiarda, Matteo; Pasricha, Gurnain; Aizenman, Joshua
    Abstract: Using a novel dataset on changes in capital controls and currency-based prudential measures in 17 major emerging market economies (EMEs) over the period 2001-2011, this paper provides new evidence on domestic and multilateral (or spillover) effects of capital controls before and after the global financial crisis. Our results, based on panel VARs, suggest that capital control actions do not allow countries to avoid the trade-offs of the monetary policy trilemma. Where they have a desired impact on the trilemma variables – net capital inflows, monetary policy autonomy and the exchange rate – the size of that impact is generally small. While we find some evidence of effectiveness before the global financial crisis, the usefulness of these measures weakened in the post-crisis environment of abundant global liquidity and relatively strong economic growth in EMEs. Our results also show that capital control policies can have unintended consequences, as resident outflows offset the impact of capital control actions on gross inflows (or vice versa). These findings highlight the importance of the macroeconomic context and of the increasing role of resident flows in understanding the effectiveness of capital inflow management. Using panel near-VARs, we find significant spillovers of capital control actions in BRICS (Brazil, Russia, India, China and South Africa) to other EMEs during the 2000s. Spillover effects were more important in the aftermath of the global financial crisis than before the crisis, and arose from inflow tightening actions, rather than outflow easing measures. The channels through which these policies spilled over to other countries were exchange rates as well as capital flows (especially cross-border bank lending). Spillovers seem to be more prevalent in Latin America than in Asia, reflecting the greater role of cross-border banking and more open capital accounts in the former countries. These results are robust to various specifications of our models. JEL Classification: F32, F41, F42
    Keywords: Capital controls, capital flows, emerging market economies, monetary policy trilemma, policy spillovers
    Date: 2015–08
  2. By: Heinz, Frigyes Ferdinand; Rusinova, Desislava
    Abstract: Using extreme value theory tools, we demonstrate that the distributions of the exchange market pressure (EMP) series for most of twelve emerging Europe countries have heavy tails, and disregarding their tail properties may lead to substantial underestimation of the probability of tail events. Using an extreme-value-based EMP crisis definition leads to a different set of crisis determinants compared to a definition based on standard errors. The probability of extreme EMP periods in our sample is affected by global risk aversion, regional contagion, the level of international reserves, foreign direct investment, history of past crises and accumulated domestic credit and real exchange rate related imbalances. JEL Classification: C10, E44, F37, F32, G01
    Keywords: Contagion, Currency crisis, Exchange market pressure, Extreme value theory, Macroeconomic imbalances
    Date: 2015–06

This nep-ifn issue is ©2015 by Vimal Balasubramaniam. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.