Monetary and Macroprudential Policies to Manage Capital Flows
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Summary:
We study interactions between monetary and macroprudential policies in a model with nominal and financial frictions. The latter derive from a financial sector that provides credit and liquidity services that lead to a financial accelerator-cum-fire-sales amplification mechanism. In response to fluctuations in world interest rates, inflation targeting dominates standard Taylor rules, but leads to increased volatility in credit and asset prices. The use of a countercyclical macroprudential instrument in addition to the policy rate improves welfare and has important implications for the conduct of monetary policy. “Leaning against the wind” or augmenting a standard Taylor rule with an argument on credit growth may not be an effective policy response.
Series:
Working Paper No. 2014/030
Subject:
Central bank policy rate Economic theory Financial frictions Financial services Inflation targeting Labor Monetary policy Reserve requirements Self-employment
English
Publication Date:
February 12, 2014
ISBN/ISSN:
9781484302873/1018-5941
Stock No:
WPIEA2014030
Pages:
44
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