Volatile Capital Flows and Economic Growth: The Role of Macro-prudential Regulation

Abstract

In this paper, the authors examine the links among macroprudential regulation, the volatility of financial flows, and economic growth. In particular, we explore whether macroprudential regulation mitigates the adverse effects of capital flows volatility on economic growth. Using cross-country data for the period 1973-2013, we find that macroprudential regulation promotes economic growth by reducing the negative impact of volatile capital flows. The findings hold for both aggregate capital flows and their various components, while they are also robust for various indicators of macroprudential policies. The results support the argument that macroprudential policy rules designed to ensure financial stability are beneficial to long-run economic growth. These outputs are part of the ‘Financial Volatility, Macroprudential Regulation and Economic Growth in Low-Income Countries’ project