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RWP 21-08, September 2021; updated February 2023

Capital flows into emerging markets have become more volatile with increased risks, which renewed interest in active capital flow management. In this paper, we argue that heightened international financial volatility and investor risk aversion incentivizes emerging market regulators to reduce the amount of risky emerging market debt to cope with elevated risk premiums. In turn, this motive can be implemented via capital inflow restrictions during periods of major financial distress, which generates a trade-off with the familiar notion to implement capital controls counter-cyclically. We then revisit the usage of capital controls in practice. We find that emerging markets, which actively revaluate their capital flow restrictions, increase capital inflow controls during episodes of major international financial distress, which is consistent with the predictions of the model.

JEL classification: F36, F38, F41

Article Citation

  • Lovchikova, Marina, and Johannes Matschke. 2021. “Capital Controls and the Global Financial Cycle.” Federal Reserve Bank of Kansas City, Research Working Paper no. 21-08, September. Available at External Link


Johannes Matschke


Johannes Matschke is an economist in the Macroeconomics and Monetary Policy Division at the Federal Reserve Bank of Kansas City. He joined the Bank in 2021 after obtaining his Ph…