Monetary and Macroprudential Policies to Manage Capital Flows

Author/Editor: Juan Pablo Medina Guzman ; Jorge Roldos
Publication Date: February 12, 2014
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
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. 14/30
Subject(s): Monetary policy | Macroprudential Policy | Capital flows | Business cycles | Financial sector | Economic models

Publication Date: February 12, 2014
ISBN/ISSN: 9781484302873/1018-5941 Format: Paper
Stock No: WPIEA2014030 Pages: 44
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