results imply that there are externalities in the use of capital flow measures, possibly justifying the case for policy coordination.

Forbes and Klein (2015) analyze policy responses during two periods marked by crises, 1997 to 2001 and 2007 to 2011, addressing the issue of selection bias by using propensity-score matching. They find that the majority of the policy responses are taken in isolation rather than simultaneously (or within one quarter of) different policies. They find that the response to a crisis is conditioned by the specific external shock, country specific economic structure and vulnerabilities, and the specific response in the previous year. They also establish that the typical response to crises has changed over time--while in the crisis in the late 1990s, several countries increased their policy rates; countries resorted to alternative measures during the crisis in the late 2000s, not increasing the rates as frequently. Importantly, they find that none of the different policy measures-- major reserve sales, large currency depreciations, substantial changes in policy interest rates, and increased controls on capital outflows-- can help a country avoid the adverse impact of the crises on real GDP growth, unemployment, and inflation. In particular, a large increase in interest rates and new capital controls cause a significant decline in GDP growth. Sharp currency depreciations may raise GDP growth over time, but only with a lagged effect and after an initial contraction.

The empirical literature on the use of capital controls as a countercyclical policy tool includes contributions by Eichengreen and Rose (2014) and Fernandez et al. (2015). Both papers show that capital controls tend to be highly persistent, and do not vary much in response to economic and financial cycles. Eichengreen and Rose (2014), using annual data for a large number of countries, do not find evidence to support the hypothesis that capital controls are used to smooth the business cycle.<sup>8</sup> Fernandez et al. (2015) too analyze annual data on the use of capital controls for a large number of advanced and developing economies during 1995-2011, and establish that capital controls are used sporadically; they are not used in a countercyclical fashion, and are not used actively during economic boom or bust episodes. Their results are robust to controlling for the level of development, external indebtedness, exchange-rate regime, and hold for the period prior to and after the global financial crisis.

A more recent contribution is Ghosh et al. (2017). Working with changes in CFMs that include liberalization and tightening of regulation for 17 emerging market economies over 20052013. They find that policy makers respond proactively to capital inflows by using a combination of policy tools—policy interest rates, exchange market intervention, and macroprudential measures; and complement these by capital inflow controls when there are issues related to competitiveness and financial stability.

> 8 Gupta (2016) notes that India has consistently liberalized its capital account since the late 1990s. The pace of liberalization has been faster during the periods of slow capital inflows, and slower during the period of rapid inflows. Once liberalized, capital flow measures have not been reversed for the most part.

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