How does the Federal Reserve's Monetary Policy Shift Affect the Sudden Stop of International Capital Flows?:Exploring the Ef-fectiveness of Macro?prudential Policy Tools
Using quarterly data from 1980 to 2021 for 64 major economies,this paper examines the impact of the Federal Reserve's monetary policy shift on sudden stop of capital flows in other countries.The key findings are as follows,Firstly,the easing of the Federal Reserve's monetary policy inhibits sudden stops of other countries,while the tightening of its monetary policy increases the probability of sudden stops by an average of 2.9％～6.2％.Secondly,the analysis of different types of capital flows reveals that the Federal Reserve's monetary poli-cy shift has no significant effect on direct investment inflows,but the tightening shift increases the probability of sudden stops for securities and other investments respectively.Thirdly,heterogeneity analysis shows that the tightening shift is more prominent in promoting sudden stops in economies with low economic development,flexibility of exchange rate systems,and financial development levels.Fourthly,mechanism analysis shows that the Fed's monetary policy shift intensifies the expectation of exchange rate depreciation and increases global financial risks,thereby promoting sudden stops of capital flows in other countries.Macro?prudential policies can effectively mitigate the impact of the Federal Reserve's tightening monetary policy on sudden stop,but the effectiveness of different types of macro?prudential tools varies.Lastly,further analysis shows that the impact of the Federal Reserve's monetary policy on sudden stops is asymmetrical.These findings have important implications for countries to cope with the impact of the Federal Reserve's monetary policy shifts and to implement effective macro?prudential supervision tools to prevent abnormal capital flows.
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