Global economic policy Uncertainty, gross capital Inflows, and the mitigating role of Macroprudential policies

We consider the effects of global economic policy uncertainty on capital inflows and the potentially mitigating effect of different macroprudential frameworks and policies on this effect. While macroprudential policies aim to maintain domestic financial stability, they can also affect cross-border capital flows. We use a global panel of 84 economies during 1997-2018, to analyze the relationships among global economic policy uncertainty, macroprudential policies, and gross capital inflows. We find that global economic policy uncertainty impacts negatively on gross capital inflows. The tightening of macroprudential policies, however, can moderate this effect by nearly 30%-40%. Disaggregating macropru-dential policy instruments indicates that supply-side tools, especially those related to bank capital requirements, are the most effective. Moreover, heterogeneity exists among differ-ent capital inflows; more specifically, portfolio investment is influenced most significantly, while direct and other types of investment remain unchanged. Our results have direct implications for the utilization of macroprudential policies in managing capital inflows.(c) 2022 Elsevier Ltd. All rights reserved.