The Time-Varying Effects of Policies: Evidence from Capital Flows to Emerging Markets

We use a novel approach—instrumental variable quantile regression estimates—to analyze expected portfolio inflows to emerging economies. We consider country-specific conditions and the effectiveness of policy interventions when economies are faced with an adverse international financial shock. This approach allows differentiation between the short- and medium-term impacts. Our results suggest that macroprudential policies and foreign exchange actions may reduce the risks of large capital flow movements following an adverse international shock; however, capital flow management policies such as capital control stringency seem to be ineffective. Besides, there is little evidence that monetary policy and high quality of institutions can immediately protect emerging markets from the risks of international financial shocks. However, institutional quality may effectively dampen the impact of excessive flows in the medium term. These findings emphasize the limitations of previous studies, which focused merely on the short-term horizon.