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Publication Detail
BSP WPS 2017-01: Capital Flow Measures and Domestic Macro Prudential Policy in Asian Emerging Economies: Have These Been Effective?

The study examines the effectiveness of cyclical capital flow measures (CFMs) and domestic macro prudential policy in restraining credit across nine Asian emerging market economies, with varying stages of financial openness and with different monetary policy setting. These countries include China, Hong Kong, India, Indonesia, South Korea, Malaysia, the Philippines, Singapore and Thailand. The study introduces new database for tightening capital inflow measures and episodes of sterilization of capital inflows and updates Shim et alís (2013) domestic policy actions on housing markets across nine Asian emerging market economies from 2004 to 2015. These three sets of database are then used to assess the effectiveness of restrictions on capital inflows and domestic macro-prudential policy in curbing real bank credit to non-financial sector, real housing credit and real house prices and to draw implications for monetary policy using a dynamic panel Generalized Method of Moments (GMM). Following diagnostic and robustness checks, the results reveal important findings. First, after controlling for episodes of sterilization of capital inflows, tightening capital inflow restrictions and domestic macro prudential policy are effective in curbing overall real bank credit, real housing credit and real house prices across nine Asian emerging market economies. Second, this study highlights the bigger negative impact of tightening measures on real house prices. Third, following the inclusion of a direct measure of capital flows into the models, cross-border loans and deposits are found to be an important channel of tightening capital inflow measures which can help reduce credit growth and real house prices. Fourth, real exchange rate appreciation drives real bank credit to non-financial sector and real house prices. Fifth, monetary policy tightening complements tight domestic macro prudential policy in restraining movements in real bank credit and real house prices. However, when domestic macro prudential policy and monetary policy action are combined with tightening capital inflow measures, the significance of either one policy in addressing real credit and real house price movements disappears.

Bangko Sentral ng Pilipinas
Authors Keywords
Bayangos, Veronica, B. ; capital flows, capital flow measures, macro prudential policy, emerging market economies;
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