Capital Controls and Monetary Policy: Impact on Credit Growth in Emerging Market Economies

ABSTRACT We examine if capital flow management (CFM) and monetary policies effectively reduce external lending in emerging economies. We estimate a dynamic panel of 21 countries over 2000–2020 with the difference and system GMM estimators. We interpret lagged policy variables as measures of the prevailing policy stance rather than as identified innovations, and we use an identified monetary policy surprise, purged of central bank information effects, as a complementary measure. Our results show that macroprudential policy and capital controls, as capital flow management policy tools, moderate credit growth. The effect is stronger under tighter monetary conditions: the marginal effect of CFM policy, evaluated across the distribution of the monetary stance and reported with delta‐method standard errors, is roughly twice as large under tight as under loose monetary conditions. Estimation over policy‐stance regimes shows that a simultaneous tightening of both instruments lowers credit growth by more than the sum of the two separate tightenings, and this result holds under floating and fixed exchange rate regimes. Our results highlight the useful role of policy coordination; however, sequential break tests identify breaks in the estimated relationship in 2008Q3 and 2020Q1, and complementarity weakens significantly during crises and periods of high global volatility. Finally, the robustness analysis shows the stability of our results across alternative proxies used in the literature.