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RWP 21-10, September 2021; updated December 2023

The IMF recently updated its institutional view on capital flow management and

macroprudential policies for emerging markets. The framework advocates a variety of

prudential tools to deal with generally complex and heterogeneous financial flows. This

paper provides a normative justification for this integrated approach when investors

have access to multiple assets. As is well known, the emerging market overborrows

in international markets, which justifies to actively manage international capital

flows. However, as a novel result, this paper also advocates complementary domestic

macroprudential policies: A reallocation of domestic resources towards internationally

constrained borrowers improves welfare because it shifts funds to households with

a higher marginal propensity to consume. This result emerges independent of any

domestic externality. A numerical exercise further shows that partial regulation can

increase the severity of a recession relative to no regulation.

JEL Classifications: F34, F41, E44, D62

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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…