The impact of macroprudential policies on capital flows in CESEE

Abstract

In line with the recent policy discussion on the use of macroprudential measures to respond to crossborder risks arising from capital flows, this paper tries to quantify to what extent macroprudential policies (MPPs) have been able to stabilize capital flows in Central, Eastern and Southeastern Europe (CESEE) -a region that experienced a substantial boom-bust cycle in capital flows amid the global financial crisis and where policymakers had been quite active in adopting MPPs already before that crisis. To study the dynamic responses of capital flows to MPP shocks, we propose a novel regimeswitching factor-augmented vector autoregressive (FAVAR) model. It allows to capture potential structural breaks in the policy regime and to control -besides domestic macroeconomic quantities -for the impact of global factors such as the global financial cycle. Feeding into this model a novel intensity-adjusted macroprudential policy index, we find that tighter MPPs may be effective in containing domestic private sector credit growth and the volumes of gross capital inflows in a majority of the countries analyzed. However, they do not seem to generally shield CESEE countries from capital flow volatility.

Understanding Monetary Spillovers in Highly Integrated Regions: The Case of Europe*

“…(2020), recently applied in Eller et al . (2021). We use the announcement‐based indicator, which is available for the subset of countries that excludes Russia and Turkey and for the period from January 2003 to September 2019.…”

“…On top of that, the bulk of the literature uses rather simple indices that primarily account for the occurrence, but not for the intensity of measures (see for example Cerutti et al, 2017). Here, we draw instead on the newly proposed intensity adjusted macro-prudential policy indicator (mpp t ) of Eller et al (2020), recently applied in Eller et al (2021). We use the announcement-based indicator, which is available for the subset of countries that excludes Russia and Turkey and for the period from January 2003 to September 2019.…”

Asian Economic Integration Report 2024

“…As this may give rise to increased financial vulnerabilities, and recognizing that flexible exchange rate regimes do not always fully insulate economies against external shocks, foreign exchange intervention and capital controls can improve policy trade-offs (IMF 2020). While Asian economies have successfully deployed macroprudential policies, capital flow management measures, and foreign exchange interventions, evidence points at the importance of the nature of shocks, economy characteristics, and initial conditions for the policies to be effective(Bergant et al 2020;Eller et al 2021;Frost, Ito, and van Stralen 2020;Gelos et al 2019;Nier, Olafsson, and Rollinson 2020;Rebucci and Ma 2019). Importantly, these policy measures should not substitute for warranted macroeconomic, financial, and structural adjustments (IMF 2020).…”