Capital flow deflection under the magnifying glass

Abstract

This document, as well as any data and map included herein, are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. 2 | ECO/WKP(2020)21 CAPITAL FLOW DEFLECTION UNDER THE MAGNIFYING GLASS Unclassified OECD Working Papers should not be reported as representing the official views of the OECD or of its member countries. The opinions expressed and arguments employed are those of the author(s). Working Papers describe preliminary results or research in progress by the author(s) and are published to stimulate discussion on a broad range of issues on which the OECD works.

Assessing the effectiveness of currency-differentiated tools

“…wider gap in the previous quarter reduces the chance of an increase), there does not appear to be any obvious driver of RR adjustments in our macro-financial variables. This is consistent with the nascent literature 21 In a recent paper, Rojas et al (2020 [36]) use the narrative approach of Romer and Romer (2010) to identify exogenous reserve requirement changes based on press release and other reports of central banks introducing these changes. They achieve this for three countries and this method would not be suitable for the large number of countries that we have.…”

“…As shown in Rojas et al (2020 [36]) for reserve requirements specifically, endogeneity concerns are real and may bias studies on their effectiveness. 21 While our lag structure should mitigate the concern, it may not fully address it.…”

“…More recently, however, reserve requirements have started to be used with new objectives and following macroprudential considerations. As mentioned, reserve requirements impact credit growth and they may be used with a macroprudential intent to dampen credit cycles when used counter-cyclically (Agénor, Alper and Pereira da Silva, 2018 [10]; Mimir, Sunel and Taşkin, 2013 [20]; Glocker and Towbin, 2012 [21]). Studying theoretically the optimal mix of a typical short-term policy rate and reserve requirements in a policy rule that smooths out fluctuations in credit spreads over the cost of foreign borrowing, Mimir and Sunel (2019[22])…”

Analysing sectoral capital flows

“…Recent efforts have highlighted geographic and asset spillovers from capital controls. From a lender/investor perspective, investors reallocate lending and investment portfolios to countries that are economically similar or to neighbouring economies (Forbes et al, 2016;Giordani et al, 2017;Gori et al, 2020;Pasricha et al, 2018). But from a domestic perspective, there may also be asset spillovers whereby controls on specific transactions may lead to the build-up of vulnerabilities through other transactions not covered by the control.…”

“…41 This result is robust to potential endogeneity using the above-mentioned two stage approach and to replacing the NFC control variable by all NFC controls (including those common to other sectors). 42 One possible explanation for why outflow controls and not inflow controls are circumvented through other domestic sectors is that in the case of inflow controls, investors can simply deflect their investment in the same asset class to other neighbours as shown in Gori et al (2020) and to the same sector. There is no such geographic diversification opportunities in the case of outflow controls if the money cannot exit the countrythus providing incentives to exit the money through other sectors.…”