are increasingly using monetary policy and exchange rates as countercyclical policy tools. Increased countercyclicality of monetary policy is also established in McGettigan et al. (2013), Vegh and Vuletin (2012), and Eichengreen and Gupta (2016) who show that countries lower policy rates in a countercyclical fashion during sudden stops of capital inflows.

The remainder of the paper is organized as follows. Section 2 briefly summarizes the literature. Section 3 describes the database and establishes some stylized facts on the use of CFMs across countries. Section 4 documents the use of CFMs in response to domestic or external conditions, and compares it with the use of monetary policy, macroprudential measures, exchange rate changes and changes in reserves. Section 5 concludes.

# **2. Literature Survey**

Despite several well-known instances when capital controls have been used in response to erratic capital flows, Chile in the 1980s, Malaysia during the Asian Crisis in the late 1990s, and Brazil on an ongoing basis, the use of capital flow measures has received rather modest attention in the literature.<sup>6</sup> This could be due to the lack of significant use of CFMs across countries; lack of data on CFMs; or the difficulty in resolving the endogeneity issue, especially if the interest is in analyzing the impact of capital flow measures. The academic interest in analyzing the use of CFMs as a legitimate policy tool has been spurred in recent years by the IMF updating its official view on its use in 2012; followed by several theoretical contributions and a few empirical contributions on this issue.

Theoretical work by Jeanne and Korinek (2010) characterizes the situations in which CFMs may be welfare enhancing—the situations when unhindered capital flows can be detrimental to economic or financial stability, yet individual agents do not internalize these effects into their own decisions, rendering a welfare enhancing role for their regulation. According to their model, an optimal policy would be to regulate the volume of capital inflows in order to curb them during the periods of large inflows (surges), and liberalizing them during large outflows (stops). CFMs are perceived to be particularly effective when there are limits on exchange rate adjustment or monetary policy.

In more recent work, Korinek (2017) quantifies the externalities of different types of capital flows – using both a statistics approach and model simulations. The paper finds that the externalities of different categories of flows differ by an order of magnitude: FDI imposes the smallest externalities, followed by portfolio equity investments, local currency debt, CPI-indexed local currency debt, GDP-linked dollar bonds, and regular dollar bonds, which impose the greatest externalities among the typical liabilities of emerging economies. The policy conclusion derived by Korinek (2017) is that CFMs should primarily aim to improve the composition of capital flows towards more insurance rather than affecting the total level of flows.

> 6 Some emerging markets, Brazil for example, have made renewed use of controls since the global financial crisis of 2008‐09 (Forbes, Fratzscher, Kostka, and Straub, 2016).

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