Effectiveness of Macroprudential Policies in Preventing Volatile Capital Flows: A Focus on Emerging Asia

Abstract

The global financial crisis reinforced the extent to how globalized and interwoven our economies and financial systems are. The economic downturn thereafter highlighted to policymakers the new challenges we face in the global era, and the fundamental lack of understanding of system-wide risk. In response to these challenges, policymakers realized the need to go beyond purely microprudential approach to financial regulation, which evolved into a growing consensus that a macroprudential approach to regulation and supervision is necessary. While the clear guidelines and toolkits of macroprudential policies are still being defined by the academic world, this paper takes a preliminary look at the effect of macroprudential policies, specifically in protecting small open economies in Southeast Asia from the volatility of capital flows. Specifically, I focus on the countries that experienced the Asian financial crisis as there are literature expressing these countries' resilience from the global economic crisis due to the many structural and financial reforms that were required under the IMF conditionalities. The results show that emerging economies in general became less sensitive to "push" factors which drive capital flows after the implementation of macroprudential policy. However, countries that experienced the Asian financial crisis grow to be more sensitive to global conditions, in contrast to the comparison group of countries.