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Global liquidity and capital flow regulations

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Abstract

After the Global Financial Crisis, the usage of capital controls and macroprudential policies has returned and becomes an essential element of the policy paradigm in different countries. However, our knowledge on the effectiveness of these policy instruments is still insufficient and requires serious empirical reconsideration. The main contribution of our paper is in identifying that capital controls (on both outflows and inflows) and macroprudential instruments are effective measures in reducing the volume of cross-border banking flows in a sample of 112 countries over the period 2000–2016. Using panel regressions incorporating country fixed effects, we find that FX and/or countercyclical reserve and countercyclical capital buffer requirements, reserve requirement ratios and concentration limits are the most effective macroprudential instruments to manage countries’ exposures to global liquidity fluctuations. Additionally, capital surcharges on SIFIs, limits on interbank exposures and foreign currency loans are also associated with a large reduction in flows, a finding which contributes to the literature by emphasizing the importance of macroprudential instruments aimed at financial institutions’ assets or liabilities. However, leverage ratios, limits on domestic currency loans, levy/tax on financial institutions, and other borrower related instruments appear to be insignificant regulatory measures. At times of large and volatile cross-border capital flows, it is desirable to employ both capital controls and macroprudential policies, with latter tend to be generally more effective measures in reducing the volume of cross-border banking flows. The results are robust to changes in the estimation methodology and varying sets of the control variables.

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Notes

  1. Fear of appreciation is defined as the tendency to intervene to depreciate (or to delay the appreciation of) the local currency [52].

  2. Fernández et al. [35] "Capital Control Measures: A New Dataset". Available at: http://www.nber.org/data-appendix/w20970/.

  3. Cerutti et al. [20, 21, 25, 26] “The Use and Effectiveness of Macroprudential Policies: New Evidence”. Available at: https://www.imf.org/en/Publications/WP/Issues/2016/12/31/The-Use-and-Effectiveness-of-Macroprudential-Policies-New-Evidence-42791.

  4. European Central Bank Warehouse macroprudential database. Available at: https://sdw.ecb.europa.eu/browse.do?node=9689335.

  5. The basket of goods reflected by the GDP deflator, which is a unit of GDP, is different from the typical basket of goods consumed by households (which is predominated by the C element of GDP). The GDP deflator should be employed to deflate nominal GDP to get real GDP. It is not a measure of household inflation, nor is it assigned to be, and employing to measure the rate of inflation rate experienced by households is not right.

  6. See Introductory Econometrics: A Modern Approach by Wooldridge [73, 74] for discussion and derivation.

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    Nataliia Osina

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Appendix: Descriptive Statistics and Benchmark Regression Results

Appendix: Descriptive Statistics and Benchmark Regression Results

See Tables 1, 2, 3, 4, 5, 6 and 7.

Benchmark Regression results

See Tables 8, 9, 10, 11, 12, 13 and 14.

Table 9 Regression results for cross-border claims to banks, for period 2000–2016
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Table 10 Regression results for cross-border claims to banks, for period 2000–2016
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Table 11 Regression results for cross-border claims to banks, for period 2000–2016
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Table 12 Panel regression results for cross-border claims to banks, for period 2000–2016
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Table 13 Regression results for cross-border claims to banks, for period 2000–2016
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Table 14 Regression results for cross-border claims to banks, for period 2000–2016
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Osina, N. Global liquidity and capital flow regulations. J Bank Regul 22, 52–72 (2021). https://doi.org/10.1057/s41261-020-00128-y

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