Do capital controls absorb global financial shocks? Evidence from emerging market economies

This paper examines the role of capital controls as an effective policy instrument to insulate Emerging Market Economies (EMEs) from global financial shocks. Using state-dependent Local Projection method on a sample of emerging market economies, we find that economies with strict inflow controls are able to moderate the effects of global financial shock on GDP, real housing prices and private credit. We also find that monetary policy responds countercyclically to global financial shock in strict capital inflow controls state, which provides support for the use of inflow controls as a macroeconomic stabilising policy tool. Further, the results suggest that individual asset category inflow controls significantly contribute to overall effectiveness of capital inflow controls to act as shock absorbers. The findings suggests that the policy makers in EMEs may consider capital controls as an effective policy tool to increase the resilience of their economies against global financial shocks.