Are capital flow management policies (CFMs) successful on mitigating capital flow episodes?

Abstract

This paper analyzes the effect of capital flow management policies (CFMs) on extreme capital flow movements. We identify CFMs for 21 countries (6 high-income, and 15 low-income) from 1999 to 2008 and classify them into capital controls and other CFMs based on whether there is a discrimination between residents and nonresidents. We find that capital controls are more effective on adjusting net capital flow episodes than other CFMs. We also find that CFMs have a similar effect on gross capital flow episodes. The analysis on capital flow volume shows that CFMs are not effective on both net and gross capital flow volume. The results suggest that CFMs, especially capital controls, could be employed as policy toolkits for mitigating extreme capital flow movement.