# **5. Conclusion**

In this paper, we analyze the use of capital flow measures by emerging market economies. Using a novel database of 47 countries from 1999:Q1 to 2016:Q2 we show that emerging market economies use CFMs rather infrequently. When countries use CFMs, they are more likely to change restriction on resident flows than on non-resident flows; and on portfolio flows rather than on FDI or banking sector related flows. There are more changes pertaining to easing of CFMs than to tightening, as evidence points to a steady trend toward the liberalization of capital accounts. Use of CFMs varies across countries and regions with countries with a more closed capital account initially, have liberalized CFMs more rapidly over the last decade and a half. However, policy makers in emerging market economies do not seem to use capital flow measures as an active tool at business cycle frequency. Instead, they primarily use monetary policy and adjustments in exchange rate, supplemented by macro prudential measures and reserve management to manage the impacts of domestic business cycles, international liquidity cycles, and shocks to capital flows. The use of capital flow measures is sporadic, and mostly acyclical when used. The systematic use of CFMs as advocated by IMF (2012), or Rey (2015) is not evident in the data.

There may be three reasons for why CFMs have not been used as a more active policy tool. First, as per an idea first explored by Bartolini and Drazen (1996), use of capital controls may have a negative signaling impact. Investors, with imperfect information about the future policy focus and the state of an economy, might perceive the use of capital controls as a signal that the underlying problems in the banking and political systems or elsewhere in the economy are worse than earlier anticipated. This adverse signal is perhaps stronger for countries that have not used CFMs in the past and weaker for countries which rely on such measures more regularly. A second reason could be that the institutional setup for monitoring the use of CFMs in emerging market economies does not exist, unlike other policies, such as monetary policy for which the clear mandate lies with the central banks. A third reason could be that CFMs are deemed to be a blunt and ineffective policy measure. While analyzing the effectiveness of these policy measures is beyond the scope of the paper, others have shown that capital flow measures are not particularly effective, since they leak, have spillovers on other countries, and generate stigma. These all could very well be the reasons why there seems to be a lack of interest in the use of CFMs.<sup>28</sup> We have made progress on the existing state of knowledge in this paper, by collating a rich data set at an appropriately high frequency, and for a representative set of countries, which allows us to analyze the policy response to both external and domestic shocks. Yet our work remains subject to certain caveats. The main one being that we are unable to distinguish between _dejure_ vs _defacto_ regulations. The point is well taken, but we contend that since we are not focusing on the impact of regulation, only its incidence, this concern is less valid in the context of this paper.

> 28 See Basu, Eichengreen and Gupta (2015) on the negative market reaction generated by the use of CFMs in India during the 2013 taper talk event.

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