The temporal dimensions of policy responses to capital surges

We demonstrate that country-specific conditions and policies that can help manage the risks of excessive capital flows behave differently over time. Employing instrumental variable quantile regression estimates, our empirical methodology scrutinizes the projected distribution of portfolio inflows to emerging markets after an adverse international financial shock. This method enables us to differentiate the efficacy of policies and country-specific conditions in both the short and medium term. In the wake of a negative shock, our findings indicate that implementing more stringent capital controls is likely detrimental. In contrast, foreign exchange interventions and macroprudential policies prove beneficial in mitigating the risks associated with excessive inflows in the short and medium term. Notably, monetary policy cannot insulate economies from the risks of substantial capital inflows in the short or medium term. Furthermore, while institutional quality does not influence the risks in the short term, it can potentially reduce them in the medium term. We underscore the intertemporal tradeoffs associated with these policies, highlighting an aspect not considered in previous studies, which predominantly focused on the short-term impact.