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The Incidence of Capital Flow Management Measures: Observations from a New Database

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Abstract

This paper presents a highly granular database of nearly 500 capital flow management measures (CFMs) that cover 14 instruments and 49 countries at monthly frequency between 2008 and 2021. It sheds light on the incidence of CFMs along previously unexplored dimensions such as the nature of instruments used, and the asset class and direction of capital flows to which they were targeted. The paper also presents new indices of capital account policies to characterize the usage, stance and intensity of CFM policies. In comparison with existing indices of capital controls, we find that our data reveal significant intra-year changes in CFMs even when other indices exhibit stability over long periods. We find that a “stock-taking” version of our data generates similar assessments about episodic versus long-standing controls as some other indices, suggesting that existing indices may be capturing low-frequency characteristics of capital account policies. Mahir Binici is a senior economist in the European Department of the IMF. Previously, he worked in the Strategy, Policy, and Review Department, where he focused on external policy issues, including those related to India. Prior to joining the IMF, he held positions as an economist at the Central Bank of Turkey and the European Central Bank. Mitali Das is an Advisor in the Fiscal Affairs Department of the IMF. Previously, she was Co-Chair of the IMF flagship publication, External Sector Report, led the analytical work on unemployment dynamics and labor shares for the World Economic Outlook, served on the IMF missions to China, Japan, and Nauru, and in the Office of the Chief Economist. Prior to the IMF, Ms. Das held academic appointments at Columbia University, Harvard University, Dartmouth College, and the University of California Davis. Evgenia Pugacheva is a research officer in the Research Department of the IMF, where she works on the World Economic Outlook report. Her research focuses on the macroeconomic implications of climate change, international trade, and the COVID-19 pandemic. Prior to joining the IMF, she worked at the World Bank on the World Development Report.

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Fig. 1

Source: Authors’ compilation from the Taxonomy

Fig. 2

Source: Authors’ compilation from the Taxonomy

Fig. 3
Fig. 4
Fig. 5

Source: International Financial Statistics and authors' calculations. Notes: Data for in-sample countries and 111 other countries in 2018. Weights for BOP are 6-quarter moving averages as of the fourth quarter of 2018. Weights for IIP are based on annual data

Fig. 6

Source: Authors’ compilation from the Taxonomy.

Fig. 7
Fig. 8

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Notes

  1. Since 2012, the IMF has used the term capital flow management for capital controls, partly because some domestically oriented macroprudential measures also limit capital flows (IMF 2012). This term has since been adopted into the academic literature, e.g., Jeanne (2012), Forbes et al. (2015).

  2. The entire database is available from any of the authors and can be requested by email. It will be posted on the internet at the time of the publication of the paper.

  3. Throughout the paper, we use “capital inflows” to refer to liability flows and “capital outflows” to refer to asset flows. Following the residency-based principle of the Balance of Payments, liability flows pertain to capital flows from or to nonresidents while asset flows pertain to capital flows from or to residents. Throughout, “inflows” and “outflows” are in gross terms. Gross inflows consist of non-residents’ net purchases of domestic assets; gross outflows consist of residents’ net purchases of foreign assets.

  4. In practice, the assessment for each measure is carried out through an iterative inter-departmental process involving the IMF’s Strategy, Policy and Review Department, Legal Department, and the Monetary and Capital Markets Department. IMF mission teams representing the country that is implementing the CFM provide all necessary inputs for this assessment, but are not otherwise involved in judging whether the measure is included in the Taxonomy. This process is designed to ensure a consistent approach in assessing whether a capital account policy measure qualifies as a CFM and it is applied equally across all member countries.

  5. That information is available in IMF internal records pertaining to the Taxonomy and the authors of this paper have been able to access and use it.

  6. We also make the database available at quarterly frequency to match the frequency at which most macroeconomic data are available.

  7. We also assign +1 to measures whose enforcement was strengthened. There are 4 such measures. There is an additional CFM whose period of enforcement was extended, also assigned +1.

  8. We write “inflow measures” (IM) as shorthand for CFMs on gross capital inflows, and analogously use “outflow measures” (OM) for capital flow management measures on gross capital outflows. The Taxonomy follows the BOP definition of gross inflows (non-residents’ net purchases of domestic assets) and gross outflows (residents’ net purchases of foreign assets).

  9. There is a small minority of cases in which CFMs are neither price-based nor administrative or can be both.

  10. The terminology in the literature is either “administrative” or “quantity-based” controls for CFMs such as quotas, approvals, outright prohibitions that are not market-based measures (see Ariyoshi et al. 2000 and Magud et al. 2018). We use the term “administrative” for these measures, which encompass both quantity based CFMs as well as the stricter enforcement of existing regulations.

  11. We write “net inflow measures” to refer to those measures that are counted in NII, i.e., tightening measures on inflows and easing measures on outflows; we use “net outflow measures” for those measures counted in NOI, i.e., tightening measures on outflows and easing measures on inflows.

  12. This index is also conceptually closer to, though still distinct from, conventional measures of capital account openness in e.g., Quinn (1997) and Chinn and Ito (2006). We provide a comparison of our “stance” to these alternatives in Sect. 4.

  13. The weighted indices are constructed at quarterly rather than monthly frequency since that is the frequency at which BOP data are made available.

  14. To illustrate, a change in the limit on portfolio debt purchases by non-residents receives a weight equal to the average share of portfolio debt flows in liability flows in the k most recent quarters.

  15. For discussion on the incidence of CFMs in the Asia/Pacific Region, see Finger and Lopez Murphy (2019).

  16. The exception was Iceland, which instituted a repatriation requirement along with a range of capital controls in November 2008 (when, compared to its level 12 months earlier, the kronur depreciated by 133 percent vis-à-vis the U.S. dollar and 71 percent in real effective terms) and removed it in March 2017.

  17. This pattern broadly holds up when we exclude Greece and Ukraine, to which a significant number of actions on outflows can be traced.

  18. Evidence that tightening of capital controls on inflows reflected investors’ abilities to circumvent existing controls is given in Simone and Sorsa (1999), De Gregório et al. (2000), Forbes (2007) and Cowan and De Gregorio (2007) for Chile in the 1990s; Cardoso and Goldfajn (1998) and Jeanne et al. (2012) for Brazil. Ostry et al. (2010) note “More relevant is the case of countries…which will need to design and implement new controls and likely strengthen them over time in the face of circumvention.”

  19. In Fernandez et al. (2016) the original scale is 0 = low restrictions; 1 = high restrictions; and CFMs original direction is positive numbers = tightening, negative numbers = easing.

  20. The correlations cannot be calculated in all pairs where the standard deviation in either country is zero.

  21. See Quinn (1997), pages 541-544 for the details of the subjective assessments used in coding the data from the AREAER.

  22. See Chinn and Ito (2006), pages 169-170 for the construction of their index, which is defined as the first principle component of the four AREAER binary variables discussed above. As noted by Chinn and Ito (P. 169-170) “by the nature of its construction, one may argue that the [index] measures the...existence of different types of restrictions” (emphasis is ours).

  23. See Fernandez et al. (2016), pages 554-556 for details. As noted by the authors (P. 550), “…this extended and updated data set reports the presence or absence of capital controls, on an annual basis, for 100 countries over the period 1995–2013” (emphasis is ours).

  24. As before, we invert the Fernandez et al. index so that, just like the Quinn (1997) and Chinn and Ito (2006) indices, higher numbers represent more openness.

  25. The publicly available Quinn database currently goes through 2018.

  26. For example, a country with vast capital account restrictions that happened to not tighten them in the time period of our database would appear more closed in the annual indices but not very restrictive by our index.

  27. The published paper only covers through the period 2012:4. We thank Gurnain Pasricha for sharing with us the updated data that runs through 2015:4.

  28. The Pasricha et al. (2018) database does not identify the measures or provide a reference to the AREAER or central bank announcement from where each measure is compiled. Therefore, we do not know what CFMs they include and cannot provide details on why those measures are not included in the Taxonomy.

  29. In the case of Malaysia and Turkey, this is the case for both inflow CFMs as well as outflow easing CFMs (columns 1, 2 and 4); in the case of China, for both inflow CFMs (columns 1 and 2); in the case of Indonesia and Korea, for both outflow CFMs (columns 3 and 4), and for Argentina, for inflow easing CFMs (column 1).

  30. For example, the Taxonomy records a (CFM/MPM) inflow tightening for Malaysia due to the minimum price for acquisition of property by foreigners introduced in 2009:2; another inflow tightening in 2010:1 when this restriction was tightened, and another inflow tightening when this measure was further tightened in 2014:1. However, Pasricha et al. (2018) do not record an inflow tightening CFM for Malaysia in 2009:2 (or in any other quarter of 2009); in 2010:1 (or any other quarter of 2010); or 2014:1 (or any other quarter of 2014).

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Acknowledgement

Yunhui Lin, and Seungeun Lee and Mona Wang provided outstanding research assistance. We thank the editor, Andrei Levchenko, and two anonymous referees for very helpful suggestions that have improved both the structure and content of our work. We have benefited from the guidance of Gita Gopinath, Sebnem Kalemli-Ozcan and Martin Schindler, and many helpful comments from John Beirne, Marcos Chamon, Pornpinun Chantapacdepong, Gaston Gelos, Hans Gensberg, Annamaria Kokenyne Ivanics, Gurnain Pasricha, Damiano Sandri, participants at OECD-IMF Workshop on Capital Flows, the Monetary Authority of Singapore, Reserve Bank of Australia, the National Bank of Belgium and the National Bank of Poland. We thank Joshua Aizenman, Gurnain Pasricha and Kristin Forbes for sharing their data with us. The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.

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    Mahir Binici, Mitali Das & Evgenia Pugacheva

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Binici, M., Das, M. & Pugacheva, E. The Incidence of Capital Flow Management Measures: Observations from a New Database. IMF Econ Rev 72, 441–486 (2024). https://doi.org/10.1057/s41308-023-00204-z

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