# **1. Introduction**

Capital flows to emerging market economies are considered to be volatile, often driven more by external factors than by domestic factors. Surges in capital flows commonly generate macroeconomic imbalances in emerging markets, resulting in rapid credit growth, asset price inflation, and economic overheating. Capital flow reversals can be disruptive too, resulting in financial volatility, economic slowdown, and in some cases distress in the banking and corporate sectors. A view that has gained some currency since the global financial crisis is that the emerging market economies may be better off by keeping their capital accounts relatively closed (Rey, 2015); or by managing their capital account policies in a countercyclical fashion (IMF, 2012), designing them as a regular instrument of economic policy and not just as a measure of last resort (Jeanne, Subramanian, and Williamson, 2012). Commensurate with these views, recent theoretical contributions have established that capital account measures may indeed be welfare enhancing.<sup>2</sup> Despite an active policy debate around it, and some theoretical contributions, not much is known about whether and how emerging market economies use capital flow measures (CFMs) in practice.<sup>3</sup> This gap is partly due to the lack of systematic high frequency data on capital flow measures for a representative set of countries. Existing measures of capital account policies, such as Chinn and Ito (2006), and Schindler (2009), are primarily based on annual information on broad capital controls in place. These measures do not record all changes in policies regulating the capital account. As such these measures are better suited for static cross-country comparisons of capital account openness in any given year, or for the direction of change in capital account policies over a fairly long period of time. They are less suited for analyzing the use of capital flow measures over a shorter horizon of business cycle frequency.<sup>4</sup> In this paper, we inform the debate on CFMs by analyzing how emerging market economies use them in practice. We specifically ask the following questions: Do emerging market economies use CFMs at business cycle frequency; does the answer depend on the type of capital flow; and are there cross-country or regional differences in the use of CFMs? How does the use of CFMs align with domestic business or financial cycles, global financial conditions, or the pace of capital flows? Has the use of CFMs changed since the global financial crisis?

In order to answer these questions we construct a novel database of policy matrix including CFMs for 47 emerging market economies between 1999:Q1 and 2016:Q2. We use the term capital flow measures to refer to all quantitative or price-based regulations of capital flows, including

> 2 See e.g. Korinek (2010), and Farhi and Werning (2014).

> 3 Exceptions include Fernandez, Rebucci, and Uribe (2015) and Eichengreen and Rose (2014). Using annual data over 1995-2011, they show that capital controls are acyclical, i.e. they do not correlate with the pace of economic activity.

> 4 Recent contributions by Ahmed and Zlate (2014) and Ghosh et al. (2017) have used the data on CFMs at quarterly frequency, albeit for a smaller set of countries and over a shorter period of time.

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