## EXECUTIVE SUMMARY

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---

### Overview
- Policymakers face difficult tradeoffs in pursuing domestic and external stabilization objectives, particularly in emerging market and developing economies (EMDEs), though also relevant for small open advanced economies.
- Cross-border capital flows provide significant benefits but may also generate or amplify shocks.
- The Integrated Policy Framework (IPF) considers jointly the role of monetary, exchange rate (including foreign exchange intervention), macroprudential and capital flow management policies, and their interactions with each other and other policies, focusing largely on countries with flexible exchange rates.
- The IPF aims to clarify the conditions under which the use of these instruments is appropriate, and it guides the deployment of multiple tools in concert to achieve macroeconomic and financial stability objectives. The framework draws on modeling work, empirical analysis, and case studies.

### Key findings from the IPF analysis
- The difficult tradeoffs faced by policymakers (especially stemming from volatile capital flows as global financial conditions change) warrant the use of multiple tools under certain conditions; deployment should be guided by a clear framework and an assessment of costs and benefits.
- Optimal policy combinations depend on the nature of shocks, country characteristics, and initial conditions; they do not imply complete reliance on exchange rate flexibility under all circumstances, nor do they imply “anything goes.”
- IPF tools should not be used to support a misaligned exchange rate.
- In countries with flexible exchange rates, deep foreign exchange markets and continuous market access, allowing full exchange rate adjustment to economic and financial shocks is typically optimal.
- In presence of frictions and vulnerabilities common in emerging market and low-income countries, FX intervention (FXI), macroprudential measures (MPMs), and capital flow management measures (CFMs) can play useful roles for certain shocks; there is no preset hierarchy or order of tools.
- MPMs, FXI, and CFMs can enhance monetary autonomy, improve financial and price stability and reduce output volatility where financial frictions and balance-sheet vulnerabilities exist.
- Precautionary reserve accumulation during normal times creates buffers for bad times.
- Precautionary CFMs on capital inflows, applied before shocks hit, can lower risks to financial stability and in some cases plug gaps in MPM coverage.
- Stabilization benefits must be balanced against potential costs: market development effects, communication challenges, and risk of perpetuating vulnerabilities through persistent use.
- Practical challenges and potential risks suggest caution, judgment, and clear communication when applying multiple tools.

### Fiscal, multilateral, and structural considerations
- The optimal IPF mix depends on structural characteristics and fiscal policies: fiscal stance and the level and composition of public debt affect initial conditions and vulnerabilities (e.g., sudden stops).
- CFMs and MPMs are better targeted to address financial stability risks and in the short term easier to adjust than fiscal instruments; IPF tools are not substitutes for appropriate fiscal policies or structural reforms.
- The IPF remains appropriate after accounting for multilateral considerations; the optimal mix depends on trading partner policies and availability of global financial backstops.

### Operational implications, safeguards, and communication
- Operationalizing IPF findings requires robustness checks, metrics to assess country characteristics, and assessment of country capacity to use multiple tools credibly.
- Establishing the right balance between short- and long-term benefits and costs is a critical remaining challenge.
- Safeguards are essential to minimize inappropriate use; potential misuses include:
  - supporting misaligned exchange rates;
  - substituting for warranted macroeconomic adjustment; and
  - impeding price discovery and competition.
- CFMs or FXI should not be aimed at preventing exchange rate appreciation to support export industries, nor used to contain inflationary pressures caused by overly expansionary monetary policy.
- Differentiating appropriate from inappropriate deployment requires suitable metrics; clear communication of actions and objectives is important when multiple tools are employed.

### Analytical work, limitations, and next steps
- Further analytical work will:
  - incorporate fiscal considerations more fully;
  - explore multilateral implications;
  - extend analysis of intertemporal tradeoffs, including long-term effects of CFMs and FXI; and
  - derive lessons from the COVID-19 crisis.
- Operationalizing findings requires metrics, robustness checks, and assessment of country capacity to use multiple tools credibly.

### Institutional context and review
- Staff remains guided by the Fund’s Institutional View (IV) on the Liberalization and Management of Capital Flows. Changes to that policy framework could be considered during the forthcoming review of the IV, tentatively scheduled for 2021. The IPF work will be a key input for this review, along with a report by the Independent Evaluation Office (IEO) on the IMF Advice on Capital Flows.

### Approved by and coordination
- Approved By Tobias Adrian, Gita Gopinath, and Martin Mühleisen.
- The IPF Board paper was coordinated by SPR (Tamim Bayoumi and Vladimir Klyuev) and prepared by an inter-departmental team led by David Hofman (MCM), Emine Boz, Marcos Chamon (RES), and Vladimir Klyuev (SPR); comprising multiple contributors across MCM, RES, and SPR under overall supervision and direction of Christopher Erceg and Ratna Sahay (MCM), Giovanni Dell’Ariccia (RES), and Tamim Bayoumi (SPR). Jonathan D. Ostry (APD, formerly RES) also supervised the project during its early phase.

*Source: ppea2020046 - EXECUTIVE SUMMARY (September 2, 2020).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Overview
- Policymakers face difficult tradeoffs in pursuing domestic and external stabilization objectives, particularly in emerging market and developing economies (EMDEs), though also relevant for small open advanced economies.
- Cross-border capital flows provide significant benefits but may also generate or amplify shocks. Responses to domestic and external shocks, including financial and commodity price shocks, have varied across countries and over time, with notable differences in underlying approaches.
- The Integrated Policy Framework (IPF) considers jointly the role of monetary, exchange rate (including foreign exchange intervention), macroprudential and capital flow management policies, and their interactions with each other and other policies, focusing largely on countries with flexible exchange rates.
- The IPF aims to clarify the conditions under which the use of these instruments is appropriate, and it guides the deployment of multiple tools in concert to achieve macroeconomic and financial stability objectives. The framework draws on modeling work, empirical analysis, and case studies.

### Key findings from the IPF analysis
- The difficult tradeoffs faced by policymakers (especially stemming from volatile capital flows as global financial conditions change) warrant the use of multiple tools under certain conditions. Their deployment should be guided by a clear framework and an assessment of costs and benefits.
- Optimal policy combinations depend on the nature of shocks, country characteristics, and initial conditions. They do not take the form of complete reliance on exchange rate flexibility under all circumstances for all countries. Neither do they take the form of “anything goes.”
- The IPF tools should not be used to support a misaligned exchange rate.
- In countries with flexible exchange rates, deep foreign exchange markets and continuous market access, allowing full exchange rate adjustment to economic and financial shocks is typically optimal.
- In the presence of frictions and vulnerabilities common in emerging market and low-income countries, while flexible exchange rates continue to provide significant benefits, other tools can play a useful role for certain shocks. In those cases, there is no preset hierarchy or order in which these tools should be used—optimal combinations depend on country conditions and shocks.
- Macroprudential measures (MPMs), foreign exchange intervention (FXI), and capital flow management measures (CFMs) can help enhance monetary autonomy, improve financial and price stability and reduce output volatility in the presence of financial frictions and balance sheet vulnerabilities.
- Precautionary reserve accumulation during normal times creates buffers for bad times.
- For countries susceptible to sudden stops in capital inflows, precautionary CFMs on capital inflows, applied before shocks hit, can lower risks to financial stability. In some cases, CFMs can help plug gaps in MPM coverage.
- These principles do not rationalize indiscriminate use of multiple tools or support their deployment in all circumstances—they clarify when they should and should not be used. Reliance on such tools is not a substitute for deep markets, healthy balance sheets, and strong institutions.
- The stabilization benefits of using IPF tools need to be balanced against potential costs in terms of market development, communication challenges, and other undesirable consequences. Persistent use of these tools may perpetuate the very vulnerabilities that rationalize their deployment.
- The practical challenges and potential risks of using these tools both in the near term and at longer horizons suggest a need for caution and judgment in their application, and the importance of communicating clearly the actions and objectives.

### Fiscal, multilateral, and structural considerations
- The optimal path of the IPF tools depends on structural characteristics and fiscal policies. The fiscal stance as well as the level and composition of public debt affect initial conditions and may make the economy more vulnerable to certain shocks such as a sudden stop.
- CFMs and MPMs are better targeted to address financial stability risks and in the short term easier to adjust than fiscal instruments. Conversely, the IPF tools are not a substitute for appropriate fiscal policies or needed structural reforms.
- The use of IPF tools would continue to be appropriate after taking multilateral considerations into account. The optimal policy mix depends on policies of trading partners and the availability of global financial backstops.

### Operational implications, safeguards, and communication
- Operationalizing IPF findings requires additional steps: ensuring robustness, developing metrics to assess country characteristics, and assessing the ability of countries to use multiple tools in a clear and credible manner.
- Establishing the right balance between short- and long-term benefits and costs of using various tools is a critical remaining challenge.
- Developing safeguards to minimize the risk of inappropriate use of IPF policies will be essential. In models, IPF tools are aimed at well-defined macroeconomic and financial stability objectives. In practice, the tools might be misused to:
  - Support misaligned exchange rates;
  - Substitute for warranted macroeconomic adjustment; or
  - Impede price discovery and competition.
- CFMs or FXI should not be aimed at preventing exchange rate appreciation to support export industries. Neither should they be used to contain inflationary pressures in the face of an overly expansionary monetary policy.
- Differentiating between appropriate and inappropriate deployment of IPF tools will require developing suitable metrics for assessing their use.
- Clear communication of actions and objectives is important, particularly where multiple tools are employed.

### Analytical work, limitations, and next steps
- Analytical work will continue to further incorporate fiscal considerations, explore more deeply multilateral implications of IPF policies, extend the existing analysis of intertemporal tradeoffs (including through greater understanding of the long-term effects of CFMs and FXI), and derive relevant lessons from the COVID-19 crisis.
- The analytical work under the IPF umbrella represents a significant advancement in thinking and modeling, building on developments in the economics profession over the past decade. Nonetheless, operationalizing these findings would require metrics, robustness checks, and assessment of country capacity to use multiple tools credibly.

### Institutional context and review
- Staff remains guided by the Fund’s Institutional View (IV) on the Liberalization and Management of Capital Flows. Changes to that policy framework could be considered during the forthcoming review of the IV, tentatively scheduled for 2021. The work on the IPF will be a key input for this review, along with a report by the Independent Evaluation Office (IEO) on the IMF Advice on Capital Flows.

### Approved by and coordination
- Approved By Tobias Adrian, Gita Gopinath, and Martin Mühleisen.
- The IPF Board paper was coordinated by SPR (Tamim Bayoumi and Vladimir Klyuev) and prepared by an inter-departmental team led by David Hofman (MCM), Emine Boz, Marcos Chamon (RES), and Vladimir Klyuev (SPR); and comprising multiple contributors across MCM, RES, and SPR under the overall supervision and direction of Christopher Erceg and Ratna Sahay (MCM), Giovanni Dell’Ariccia (RES), and Tamim Bayoumi (SPR). Jonathan D. Ostry (APD, formerly RES) also supervised the project during its early phase.

*Source: ppea2020046 - EXECUTIVE SUMMARY (September 2, 2020).*

### 5. The IPF considers jointly the role of monetary, exchange rate, macroprudential and

### 5. The IPF considers jointly the role of monetary, exchange rate, macroprudential and capital flow management policies, and their interactions with each other and other policies.

### Overview and high-level findings
- Analytical work under the IPF umbrella establishes that optimal policies do not take the form of complete reliance on exchange rate flexibility under all circumstances for all countries.
- Optimal policies depend on:
  - the nature of shocks,
  - country characteristics,
  - initial conditions.
- The IPF tools should not be used to support a misaligned exchange rate; safeguards to minimize inappropriate use are essential.
- In countries with deep foreign exchange markets and continuous market access, fully flexible exchange rates are typically optimal.
- Frameworks that incorporate frictions common in EMDEs suggest a role for FX intervention (FXI), macroprudential measures (MPMs) and capital flow measures (CFMs) under certain circumstances.
- Fiscal and structural frameworks, variables and policies are taken as given when deciding the optimal mix of IPF policies; the mix can be conditioned on alternative fiscal paths consistent with public debt sustainability.
- The IPF is intended to be applicable to both “routine” shocks and crisis situations, though major crises have idiosyncratic features that require tailoring responses, including potentially a more active role for fiscal policy.
- The optimal policy mix also depends on actions of trading partners (including monetary and fiscal policies in major economies) and global institutions.

### Modeling, empirical work, and case studies
- The framework draws together:
  - modeling,
  - empirical work,
  - a review of country experiences and case studies involving policymakers.
- Cross-country empirical analysis explored whether model insights generalize and assessed impacts of policy instruments individually and in combinations.
- Models provide prescriptions for optimal policy choices in stylized settings; empirical work and case discussions help ensure those stylized worlds reasonably represent reality.
- Two models introduced:
  - A conceptual micro-founded New Keynesian open-economy model (Basu et al. 2020) that jointly analyzes all four IPF policies.
  - A quantitative empirically-oriented New Keynesian open-economy model (Adrian et al. 2020) for quantifying policy tradeoffs and mitigation potential of IPF tools.

### Key modeling insights and frictions
- Standard workhorse macroeconomic model: with flexible exchange rates, free adjustment is recommended; depreciation following adverse shocks supports stabilization via expenditure switching.
- Important real and financial frictions considered:
  - Dominant Currency Paradigm (DCP): many exporters price in dollars and those prices are sticky; weakens expenditure switching.
  - Currency mismatches on borrowers’ balance sheets: depreciation raises burden of unhedged FX debt, raising borrowing costs and reducing creditworthiness.
  - Shallow FX markets: external shocks are not absorbed easily, amplifying domestic impact.
- These frictions can create rationale for alternative policy tools:
  - FXI can affect exchange rate when FX markets are shallow.
  - CFMs and MPMs can discourage risky liability structures and manage external funding vulnerabilities.

### Boxed model features (conceptual and quantitative)
- Conceptual model (Basu et al. 2020) features:
  - households and firms in tradable goods and housing sectors,
  - domestic banks accessing world capital markets through intermediaries with limited currency risk capacity,
  - borrowing constrained by collateral values,
  - focus on debt flows in FX and domestic currency,
  - shocks: productivity, commodity prices, world interest rate, domestic and external debt limits, foreign appetite for domestic debt,
  - country characteristics: currency of trade invoicing, commodity export share, currency mismatches, credit market imperfections, stock of debt, depth of FX market.
- Externalities the optimal IPF policies seek to correct:
  - households do not internalize their consumption impact on aggregate demand,
  - households and banks do not internalize effects of borrowing/lending on external interest premia,
  - households and banks do not internalize effects on exchange rate and thus on FX borrowing constraints,
  - housing firms do not internalize effects of borrowing on land prices.
- Policy transmission channels in conceptual model:
  - Monetary policy operates via interest rates;
  - FXI works via portfolio balance effects and changes in premia demanded by intermediaries;
  - MPMs act as taxes on consumer and housing loans to discourage excessive borrowing;
  - CFMs act as a tax on external funding by banks.
- Quantitative model (Adrian et al. 2020) features:
  - nonlinear balance sheet channel linking UIP risk premium to net foreign liabilities,
  - exchange rate fluctuations can markedly affect domestic financial conditions (e.g., private borrowing spreads),
  - imperfect monetary policy credibility that amplifies exchange rate effects on inflation expectations.
- Quantitative insights:
  - Depreciation raises output for large AEs with small, transient inflation effects.
  - For EMDEs with poorly anchored inflation expectations, depreciation can force central banks into a difficult tradeoff between tightening to stabilize inflation (causing steep output decline) and allowing inflation to drift.
  - EMDEs with large net foreign liabilities are particularly vulnerable: higher increases in inflation, deeper output contractions, and worsening spreads even after tightening.

### Optimal use of IPF tools and tradeoffs
- Availability of a policy tool does not imply it should be used; full exchange rate flexibility is appropriate in many cases, particularly for countries with:
  - deep FX markets,
  - continuous access to external financial markets,
  - well-anchored inflation expectations.
- High dollar invoicing weakens stabilization benefits of exchange rate flexibility but does not by itself create a role for other IPF tools absent financial market imperfections.
- Active use of FXI, MPMs, and CFMs should generally be limited to shocks emanating from financial markets rather than the real economy, unless the real shocks generate financial stability concerns.
- There is no one-to-one assignment between policies and market imperfections; policies affect several imperfections and interact with each other:
  - Any change in one policy affects optimal levels of other policies.
  - No preset hierarchy or order of use; optimality depends on specific circumstances defined in the models.
- Precautionary CFMs on capital inflows, applied before shocks hit, can lower risks to financial stability in countries vulnerable to sudden stops; such CFMs should be adjusted as risks evolve and calibrated to structural features.
- The appropriate metric for vulnerability is the stock (not just the flow) of risky liabilities.
- MPMs and CFMs can be substitutes or complements:
  - They are imperfect substitutes with respect to sectors at risk when MPMs curb domestic-bank lending and CFMs curb external funding by banks.
  - Substitutability is limited when flows move into unregulated sectors or when MPMs are circumvented by direct external borrowing; CFMs then complement MPMs by plugging leakages.

### Safeguards, implementation, and crisis application
- Safeguards are needed to prevent inappropriate use of IPF tools to support misaligned exchange rates.
- Fiscal policy can have frontloaded effects via asset prices and confidence that cushion downside risks and complement IPF tools; however, fiscal policy is less well suited to address capital flow and external debt issues compared with CFMs and MPMs.
- The IPF framework is applicable to crisis situations but requires tailoring to idiosyncratic crisis features, potentially giving fiscal policy a more active role in some crises.
- While the framework is not applied specifically to the COVID-19 crisis in this paper, analysis suggests IPF tools used in concert can ease pronounced financial stresses and capital outflow pressures, especially in countries with:
  - shallower FX markets,
  - substantial foreign currency debt,
  - less well-anchored inflation expectations.

*Source: ppea2020046*

### 15. Appropriate use of FXI, MPMs and CFMs in the face of financial frictions and shocks

### 15. Appropriate use of FXI, MPMs and CFMs in the face of financial frictions and shocks

### Overview
- Appropriate use of FXI, MPMs and CFMs can enhance monetary policy autonomy and contribute to financial stability by reducing the need for monetary policy to respond to external shocks and allowing it to focus on domestic objectives.
- The calibrated IPF model quantifies gains from using IPF tools to improve policy tradeoffs and mitigate downside risks (see Section 16).

### FX intervention (FXI)
- Rationale and effects:
  - If FX markets are shallow and FXI has traction, intervention that leans against inflow/outflow surges reduces excessive volatility of the exchange rate and interest rate premia.
  - Benefit can be larger if inflation expectations are less anchored.
  - FX sales during stressed depreciation episodes can relieve binding external borrowing constraints.
  - Precautionary reserve accumulation during normal times creates buffers that allow intervention during bad times.
- Model implications:
  - FXI can improve the inflation-output tradeoff in some EMDEs by limiting exchange rate and inflationary pressures and thereby allowing monetary policy to focus more on output stabilization.
  - FXI attenuates the impact of shocks on the UIP risk premium and private borrowing spreads.
  - FXI purchases can help countries in a liquidity trap by stimulating output and inflation, lowering the real interest rate, and allowing the central bank to achieve its inflation objective, but should not be used to maintain a misaligned exchange rate and may have adverse spillovers.

### Macroprudential policies (MPMs) and inflow capital flow measures (CFMs) during normal times
- Rationale and effects:
  - These policies can prevent the buildup of risky liability structures.
  - If adjusted over the cycle (tightened/loosened during surges/retrenchments in domestic credit or external debt), they help insulate domestic aggregate demand from external shocks and allow monetary policy to focus on domestic inflation pressures.
  - MPMs can reduce the domestic buildup of vulnerabilities stemming from easy global financial conditions and bolster resilience to shocks.

### Outflow CFMs in crisis times
- Rationale and effects:
  - Outflow CFMs can attenuate exchange rate pressures from monetary policy easing and help preserve financial stability.
  - Outflow CFMs are associated with reputational costs.
  - Use of outflow CFMs may be more attractive for countries where the stock of reserves is limited, or where the shock is highly persistent and sustained FXI would imply large reserve losses.

### Domestic financial sector development
- Rationale and effects:
  - Development contributes to resilience to external shocks.
  - Increases in the ability to pledge and seize collateral reduce the risk that borrowing constraints bind and fire-sales are triggered after a shock.
  - Development of a domestic investor base can also contribute to resilience.
  - The IMF provides Technical Assistance to facilitate the development of markets and policy institutions.

### Model quantification and policy tradeoffs (Section 16)
- The calibrated IPF model findings:
  - FXI can improve the inflation-output tradeoff by limiting exchange rate and inflationary pressures.
  - FXI attenuates the impact of shocks on the UIP risk premium and private borrowing spreads.
  - Use of CFMs (and MPMs, not explicitly in the model) can yield more monetary policy space.
  - FXI purchases can be useful in a liquidity trap consistent with Svensson (2003), but may generate adverse spillovers, amplified when more countries reach the effective lower bound.

### Appropriate policy mix by shock and country characteristics (Section 17)
- General principle: optimal response depends on the degree of currency mismatches and the depth of FX markets.
- Examples of responses:
  - Risk-off shocks:
    - Countries with deep FX markets: generally do not need to adjust domestic policy settings except after severe shocks that give rise to financial stability concerns (heightened by currency mismatches).
    - Countries with shallow FX markets: experience macro destabilization and should use FXI, CFMs, and MPMs temporarily to stabilize interest premia (not to target the exchange rate level/volatility per se); be alert to spillovers to the nontradable sector and adjust MPMs.
  - Fundamental changes in world interest rates:
    - Countries with both deep and shallow FX markets should generally accommodate such shocks, except to contain growth in unhedged FX liabilities and any subsequent tightening of domestic/external constraints.
  - Real shocks (productivity, commodity prices):
    - If permanent and external constraints do not bind: use exchange rate flexibility to accommodate shocks, irrespective of FX market depth (excessive stabilization harms interest premia and domestic stability).
    - If temporary: no additional policies under deep FX markets; limited case for easing adjustment of external debt levels under shallow FX markets.
    - If shocks bind domestic or external constraints: use a combination of IPF policies to alleviate constraints (may include smoothing exchange rate adjustment after permanent shocks).

### Fiscal policy interactions (Section 18)
- Fiscal policies affect the appropriate mix of IPF tools but are not adequate substitutes:
  - Fiscal stance and debt composition (currency, maturity, creditor base) affect vulnerability to shocks such as sudden stops.
  - Fiscal policy can complement IPF tools in supporting macroeconomic and financial stability objectives but is less well tailored and slower to target financial stability risks (e.g., UIP risk premium spikes).
  - Fiscal measures to mitigate sudden-stop risks (cutting spending, accumulating FX assets, providing support) carry distortionary costs and can encourage more FX borrowing if agents expect future support—making fiscal policy a poor substitute for CFMs and MPMs.
  - Adjusting IPF tools to offset inappropriate fiscal policy is inferior to correcting fiscal policy at source.

### Multilateral context and spillovers (Section 19)
- Coordinated use of IPF tools may be desirable from a global perspective, including for global shocks such as COVID-19, but tools can have negative spillovers under some conditions.
- Types of spillovers:
  - Capital flow spillovers between recipient countries:
    - IPF use in countries with frictions could deflect capital flows to other countries with fewer frictions; conversely, tools can help manage flows more efficiently and reduce crisis risk.
  - Macroeconomic stabilization and spillovers:
    - If IPF tools help countries achieve stability without substantial exchange rate depreciation or excessive capital flow volatility, net spillovers may be positive.
    - Negative macro spillovers may arise if IPF tools induce substantial exchange rate depreciation and trading partners cannot offset negative aggregate demand effects due to the effective lower bound.
    - Risk of negative spillovers is exacerbated if IPF policies are misused to support external competitiveness.
  - Source-to-recipient spillovers:
    - Models capture multilateral spillovers from source countries such as world interest rate shocks and risk-off shock characteristics.

### Crisis role and COVID-19 context (Section 20)
- Models highlight constructive role of IPF tools in crises.
- During COVID-19 many countries with shallower FX markets responded with FX sales and easing MPMs; CFMs were used more sparingly.
- Considerable downside risks remain that could warrant broader deployment of the full complement of IPF tools.

### Empirical evidence: main takeaways (Section 22)
- Evidence indicates:
  - MPMs, FXI and CFMs can help meet financial stability, price stability, and output stabilization goals, and increase monetary policy autonomy.
  - MPMs reduce domestic buildup of vulnerabilities from easy global financial conditions and bolster resilience.
  - CFMs can reduce volatility of capital flows and the buildup of vulnerabilities; strong evidence that CFMs affect composition of flows in line with financial stability objectives, even if not overall volumes.
  - Empirical evidence supports effectiveness of existing/precautionary CFMs.
  - Less evidence for effectiveness of reactive CFMs in response to shocks.
  - When reacting to loosening external financial conditions, tightening MPMs appears to offer the highest net benefit in minimizing output and inflation volatility.
  - FXI can materially affect the exchange rate (at least short term) and may assist in managing capital flows; appropriate stocks of foreign exchange reserves reduce vulnerabilities.
  - Some evidence FXI can encourage buildup of unhedged FX liabilities.
  - Limited evidence so far that use of MPMs, FXI or CFMs affects long-term growth prospects, or that FXI reduces central bank credibility.

### Limitations of monetary policy and exchange rate flexibility (Section 23)
- Monetary policy autonomy is often circumscribed by the “global financial cycle”; even fully flexible exchange rates do not insulate economies fully.
- IMF (2017) finds global financial conditions account for about 20 to 40 percent of variation in domestic financial conditions.
- Studies find spillovers from U.S. monetary policy affect recipient countries’ financial firms’ leverage and spreads.
- Empirical evidence suggests monetary policy may not always be effective in addressing external shocks:
  - Gelos et al. (2019) find no evidence monetary policy mitigates impact of shocks on future capital flows to EMs in short/medium term.
  - Kalemli-Ozcan (2019) and Brandao-Marques et al. (2020) confirm limited effectiveness and high cost of using monetary policy to offset external shocks.
  - Literature suggests monetary policy is often inefficient for addressing financial stability concerns.

*Source: ppea2020046 - 15. Appropriate use of FXI, MPMs and CFMs in the face of financial frictions and shocks.*

### 25. Dominant currency pricing and financing can limit the benefits of exchange rate

### 25. Dominant currency pricing and financing can limit the benefits of exchange rate

### Dominant currency pricing and financing: short-term trade response
- Most EMDEs price their exports in dollars, purchase imports priced in dollars, and borrow in dollars.
- With dominant currency pricing, a country’s exchange rate vis-à-vis the dollar (not vis-à-vis its trading partners) is the major determinant of passthrough and traded volumes in the short term (Gopinath et al., 2020; Adler, Casas et al., 2020).
- Exchange rate depreciation in these countries is associated with:
  - a cutback in imports; and
  - no significant increase in exports in the short term.
- In countries whose corporates depend on dollar financing, a depreciation can lead to:
  - financial distress; and
  - a cutback in imports with no stimulative effect on exports (Adler, Casas et al., 2020).
- Overall implication: with dominant currency pricing and financing, the short-term response of trade volumes to exchange rates is likely to be more muted and manifested mostly through imports.
- Medium-term role: exchange rate adjustment remains key for achieving durable, medium-term external balance.

### Empirical evidence for IPF tools: rationale and scope
- Limitations of monetary policy create rationale for using additional tools; literature on effectiveness of FXI, CFMs, and MPMs is evolving.
- Empirical IMF staff work investigates interactions and complementarity between tools and usefulness in addressing external shocks.
- Important caveat: a tool’s effectiveness for a particular objective does not imply appropriateness for broader macroeconomic objectives or welfare maximization.

### Macroprudential Measures (MPMs): use and effects
- Deployment and coverage:
  - Use of macroprudential policy instruments has grown steadily in the past 30 years (Figure 3), with over 90 percent of reporting economies now using at least one such tool (Alam et al., 2019).
  - In EMDEs, the most widely used tools are limits on FX positions.
- Determinants of use:
  - Changes in MPM settings generally respond mainly to domestic financial variables, especially credit growth (e.g., Aikman et al., 2015; Brandao-Marques et al., 2020; Nier et al., 2020).
  - Some evidence that MPM use in EMDEs also responds to external factors such as U.S. interest rates and capital flows (IMF, 2020a; Finger and Lopez Murphy, 2019).
- Effectiveness:
  - MPMs are effective in moderating credit developments (Forbes, 2019; Alam et al., 2019; Araujo et al., 2020).
  - Effects appear larger for emerging markets (Araujo et al., 2020).
  - Precautionary MPMs are especially useful; existing macroprudential regulation is more effective than reactive tightening in limiting leverage buildup among financial firms during episodes of loose U.S. monetary policy (Cecchetti et al., forthcoming).
  - Tighter existing MPMs can dampen effects of global financial shocks on GDP growth in EMDEs (IMF, 2020a).
  - Strongest evidence for borrower-based MPMs, such as debt-service-to-income ratios (Fendoğlu, 2017; Brandao-Marques et al., 2020; Nier et al., 2020).
  - Evidence that FX exposure limits help curb lending in foreign currencies (Forbes, 2019).
- Costs and leakage:
  - Short-run cost to output of typical MPM seems small (IMF, 2020a; Alam et al., 2019; Araujo et al., 2020), though some measures like loan-to-value caps can have larger costs (Richter et al., 2018).
  - Costs sensitive to prevailing level of MPMs and can rise when MPMs are already tight (Alam et al., 2019).
  - MPMs may “leak” by encouraging credit provision by non-banks and from abroad (Ahnert et al., 2018; Nier et al., forthcoming).
  - Some leakage effects stronger for borrower-based tools (Cizel et al., 2016; Nier et al., 2020).
- External spillovers:
  - Tighter macroprudential regulation in one country can enhance resilience in others (IMF, 2020a).
  - Home tightening can lead banks to increase loan-to-value and loan-to-income ratios on lending abroad (McCann and O’Tool, 2019).
  - Effects vary across instruments and banks (Buch and Goldberg, 2017).

### Foreign Exchange Intervention (FXI): objectives and effectiveness
- Objectives for FXI reported by authorities:
  - inflation control;
  - building reserves;
  - muting volatility in shallow FX markets;
  - preserving financial stability with balance sheet mismatches; and
  - preventing overvaluation that may hurt competitiveness (Hofman et al., 2020; Poirson et al., forthcoming).
- Practice and patterns:
  - Interventions in EMDEs tend to be asymmetric, leaning more against currency appreciation during inflow periods than against depreciation during outflows (Adler, Chang et al., 2020; Adler et al., forthcoming; Chamon et al., 2019; Poirson et al., forthcoming).
  - Countries with higher reserves face less asset price and capital flow volatility than those with low reserves (Sahay et al., 2014).
  - Countries with larger balance sheet vulnerabilities and shallower FX markets intervene more in response to similar shocks (Mano and Sgherri, 2020).
- Effect on exchange rates and flows:
  - Literature suggests FXI has a material effect on the exchange rate at least in the short run (Chamon et al., 2019; Fratzscher et al., 2019).
  - FXI most effective when consistent with fundamentals and monetary policy stance (Adler and Tovar, 2014; Daude et al., 2016; Menkhoff, 2013).
  - Evidence of persistent impact is scant, though some studies find effects at annual and quarterly frequencies (Gagnon et al., 2017; Filardo et al., forthcoming).
  - FX sales can greatly reduce financial market stress and are effective in reducing capital outflows in response to external shocks (Domanski et al., 2016; Gelos et al., 2019).
  - FXI can mitigate downside risks to portfolio inflows and is particularly effective against portfolio debt inflows (Blanchard et al., 2017).
  - By muting short-term volatility, FXI may help avoid exchange rate overshooting that reduces competitiveness and amplifies balance sheet mismatches (Culiuc, 2020).
- Reserves:
  - Foreign exchange reserves reduce external vulnerabilities and justify precautionary accumulation to meet adequacy metrics (Frankel and Saravelos, 2012; Cubeddu et al., forthcoming).
  - High reserve cover provides extra policy space, enabling countercyclical monetary and fiscal responses and limiting borrowing costs and credit risk (Sgherri and Shao, forthcoming).
  - Reserve holdings involve sterilization costs and central bank balance sheet risks (Rodrick, 2006; Levy Yeyati, 2008; Filardo and Yetman, 2012).
  - Diminishing returns to reserve accumulation are noted.

### Capital Flow Management Measures (CFMs): characteristics and evidence
- Measurement challenges:
  - CFMs are diverse, difficult to measure quantitatively, and aggregation can obscure important differences across instruments.
- Nature and drivers:
  - Majority of CFMs are structural/administrative and do not change year to year (Bhargava et al., forthcoming; Eichengreen and Rose, 2014; Gupta and Masetti, 2018).
  - Countries use CFMs for macroprudential and external competitiveness objectives (Pasricha, 2020).
- Effectiveness on composition and size of flows:
  - Substantial evidence that CFMs can change composition of capital flows toward longer maturities or away from portfolio debt (Erten et al., 2019; Rebucci and Ma, 2019).
  - Mixed evidence on whether CFMs affect overall size of flows (Nispi Landi and Schiavone, 2018; Binici et al., 2010; Magud et al., 2018; Habermeier et al., 2011).
  - Certain CFMs reduce financial fragility and can increase monetary policy autonomy and help address exchange rate pressures (Forbes et al., 2015; Frost et al., 2020; Aizenman et al., 2015; Pasricha et al., 2018; Georgiardis and Zhu, 2019; Magud et al., 2018).
  - Effectiveness depends on external conditions and may weaken over time (Pasricha et al., 2018).
- Precautionary CFMs:
  - Evidence points to beneficial effects from precautionary CFMs:
    - Long-standing CFMs (“walls”) more effective for monetary policy autonomy than episodic measures (“gates”) (Klein, 2012).
    - Existing CFMs contain output falls during currency crises (Gupta et al., 2007).
    - CFMs on debt flows during booms associated with greater resilience via lower FX lending and external portfolio debt (Ostry et al., 2010; Ostry, Ghosh, Chamon, and Qureshi, 2012).
    - Existing CFMs on cross-border borrowing help contain such borrowing in local credit booms (Nier et al., 2020).
    - Precautionary CFMs on nonresident inflows reduce probability of inflow surges (Bhargava et al., forthcoming).
    - Countries with higher existing CFMs experience lower drops in nonresident inflows and resident outflows during crises (Bouis et al., forthcoming).
    - Precautionary CFMs associated with smaller increases in interest rate risk premia during risk-off shocks (Das et al., forthcoming).
  - Tightening CFMs in response to adverse global shocks can be counterproductive and raise outflow risk (Gelos et al., 2019).
- Spillovers and deflection:
  - CFMs can deflect capital flows to other borrowing countries with similar characteristics (Giordani et al., 2014).
  - Evidence of deflection in Brazil’s tax on foreign portfolio investments (Forbes et al., 2016).
  - Capital flow policies in large EMs had significant implications for other countries via exchange rates and capital flows (Pasricha et al., 2018).

### Joint use of IPF tools: complementarities and trade-offs
- Room for monetary policy:
  - Appropriate use of MPMs, CFMs, and FXI may allow monetary policy to focus on domestic stability objectives.
  - Evidence strongest for MPMs: MPMs help contain financial vulnerabilities at little cost, unlike monetary policy leaning against the wind which causes sizable welfare losses (Brandao-Marques et al., 2020).
  - IMF (2020a) documents higher macroprudential regulation levels associated with more countercyclical monetary policy responses to global shocks.
  - Implementing CFMs or MPMs can make monetary policy actions more sensitive to expected inflation (Mano and Sgherri, 2020).
- Interactions:
  - Exchange rate appreciation is associated with increases in the credit-to-GDP gap; prior macroprudential tightening can mitigate this, reducing need for FXI to lean against appreciation (Nier et al., 2020).
  - Capital inflow CFMs can reduce leakages from MPMs and dampen feedback when domestic credit growth raises borrowing from abroad (Nier et al., 2020).
  - CFMs may enhance FXI effectiveness; FXI has more traction in countries with a less open capital account (Adler and Tovar, 2014; Poirson et al., forthcoming).
- Policy combinations:
  - Combinations of tools can be more effective than single instruments:
    - Emerging markets respond to negative shocks by increasing policy rate and reducing reserve requirements simultaneously (Cordella et al., 2014).
    - Macroprudential tightening together with monetary accommodation more effective than MPMs alone in containing effects of easing global financial conditions on tail GDP risks (Brandao-Marques et al., 2020).
    - Combinations of monetary policy and FXI can smooth external financing shocks better than either tool individually (Poirson et al., forthcoming).
  - Effectiveness of combinations depends on nature of the shock and country circumstances (IPF model findings).

*International Monetary Fund — TOWARD AN INTEGRATED POLICY FRAMEWORK, Chapter 25*

### 44. Benefits of additional instruments increase when monetary policy faces a lower bound

### 44. Benefits of additional instruments increase when monetary policy faces a lower bound

### Usefulness of additional instruments when the effective lower bound binds
- The usefulness of additional tools is accentuated when monetary policy is constrained by the effective lower bound.
- Svensson (2000) and McCallum (2000) suggested that FXI should be used when conventional monetary policy instruments are no longer effective.
- A few smaller AEs have experimented with FXI (Badescu, 2016; Lizal and Schwarz, 2013; Caselli 2017).

### D. Long-Term Effects — sustained FXI, leverage, and reserves
- Sustained FXI may encourage corporate leverage and foreign currency borrowing.
- Cross-country evidence linking exchange rate regimes and financial vulnerabilities suggests exchange rate rigidity may contribute to dollarization and the buildup of FX mismatches (Hofman et al., 2020; Ghosh et al., 2015; Ye et al., 2014).
- Csonto and Gudmundsson (2020): countries with greater exchange rate flexibility experience lower vulnerability in the form of declining foreign currency debt.
- Kim et al. (2020): unhedged corporate borrowers in EMs with less developed financial markets raise their FX debt following periods of intense FX interventions.
- Tong and Wei (2019), sample of 23 EMDEs: foreign reserve accumulation leads to higher corporate leverage.
- Little empirical research exists on the direct impact of FXI on long-term financial development or reforms; the relationship between FXI and market development remains unclear (Mohanty, 2013; Gadanecz and Mehrotra 2013).
- FXI could potentially weaken central bank credibility, though evidence is limited and mixed:
  - Unsal et al. (forthcoming): central banks using multiple instruments appear to have less transparent practices and inconsistencies that may impact credibility.
  - Adler et al. (forthcoming): more prevalent use of FXI increases propensity to overshoot inflation targets, suggesting weakened credibility.
  - Hofman et al. (2020): find no such evidence.

### CFMs and long-term growth
- Empirical evidence of CFMs’ impact on long-term growth is limited.
- Established evidence links foreign direct investment and nondebt flows to growth (Dabla-Norris et al., 2010; Edwards, 2007; Henry, 2007; Kose et al., 2008), but evidence for debt-creating flows is weaker (Jeanne et al., 2012).
- Firm-level studies: capital flows increase investment by lowering the cost of equity (Chari and Henry, 2008; Kacperczyk et al., 2018) and local borrowing costs of multinationals (Desai et al., 2006).
- CFMs may reduce market discipline and tighten financing constraints (Aizenman and Glick, 2009; Forbes, 2005, 2007a and 2007b; Alfaro et al., 2017; Rajan and Zingales, 2003).
- Recent work calls overall growth impact into question:
  - Brandao-Marques et al. (2020): CFMs responding to easy global conditions have small effects on future growth.
  - Bouis et al. (forthcoming): countries using outflow CFMs in a crisis see sharper drops in sovereign ratings but recover ratings as fast as countries that did not rely on CFMs.

### Overall long-term policy determinants
- Long-term outcomes depend on many policy dimensions; macroeconomic policies alone cannot solve all problems.
- Micro and institutional development policies are key complements (North, 1990, 1991; Rodrik et al., 2002; Dincer and Eichengreen, 2014).
- Fund capacity development in market, bank, and institutional development complements IPF tools and affects long-run tradeoffs.

### Safeguards against inappropriate use of IPF tools
- IPF tools in model frameworks are aimed at well-defined macroeconomic and financial stability objectives: to stabilize inflation and output by minimizing incidence and severity of domestic and external crises—not to prevent necessary adjustment or allow unsustainable policies to persist.
- Precautionary CFMs should be used alongside MPMs to reduce FX mismatches so countries can benefit from greater exchange rate flexibility when shocks materialize.
- CFMs or FXI should not be used to:
  - prevent exchange rate appreciation to support export industries;
  - contain inflationary pressures in the face of an overly expansionary monetary policy;
  - obstruct adjustment to permanent real shocks in countries with shallow FX markets.
- IPF tools may be used inappropriately in practice due to real-time diagnostic difficulties. Examples of inappropriate objectives include:
  - Exchange rate undervaluation: using IPF tools with excessively contractionary fiscal policy to limit appreciation and preserve competitiveness—such policies excessively curtail consumption, have adverse beggar-thy-neighbor spillovers, and cannot be justified in the model frameworks.
  - Substituting for warranted fiscal consolidation or monetary tightening: delaying consolidation may increase risk of a disorderly adjustment; using IPF tools instead of monetary adjustment diminishes credibility and reduces future effectiveness.
  - Impediments to competition and price discovery: CFMs and MPMs used for protectionist purposes or to erode FX market functioning may yield short-term gains but increase vulnerability to future shocks.

### Metrics and safeguards to minimize misuse
- Developing safeguards will be key to translating framework findings into implementable advice. Potential metrics include:
  - Measures of unhedged FX mismatch, debt levels, debt maturity, and domestic credit for the aggregate economy and for specific sectors, potentially adjusting for government buffers such as FX reserves.
  - Evidence on MPM circumvention and coverage, e.g., corporates’ access to FX borrowing from abroad.
  - Measures of excessive deviations in interest premia after global financial turbulence to assess FX market absorption capacity.
  - External sector assessments as in External Sector Reports.
  - Public debt sustainability assessment and fiscal crisis risk as provided by the MAC DSA and LIC DSF.
  - Monetary framework assessments covering credibility, anchoring of inflation expectations, independence, coherent policy and operational strategy, and clarity of communication with existing tools.

### Guidance, communication, and practical application
- Transparent policy guidance based on observable real-time metrics could facilitate IPF tool application, complemented by expert judgment.
- Models provide benchmarks and alerts to misuse; with experience, authorities could develop policy rules-of-thumb to aid communication and build credibility.
- Models are stylized and do not cover all scenarios; empirical measurement of policy effectiveness is challenging due to objective ambiguity, endogeneity, and measurement difficulties for CFMs and MPMs.
- Practical challenges include identifying nature of shocks in real time and calibrating precautionary CFMs.

### Summary of analytical findings and caveats
- The IPF framework enriches understanding of interactions among shocks, policies, and country characteristics, using a unified framework to assess policy appropriateness.
- Key conclusions supported by models and empirical work:
  - Optimal policy combinations depend on shocks, country characteristics, and initial conditions—no preset hierarchy of policies.
  - Models with EMDE frictions suggest roles for FXI, MPMs, and CFMs in some circumstances: lowering sudden-stop risks, enhancing monetary policy autonomy, improving output-inflation tradeoffs, and building precautionary reserves.
  - Usefulness and appropriateness vary with vulnerabilities and shock nature; these tools should not be used for shocks that do not exacerbate financial conditions or to maintain misaligned exchange rates.
  - In countries with deep FX markets and continuous access, models do not justify FXI or CFMs; fully flexible exchange rates and monetary policy aimed at domestic objectives are preferable.
  - Empirical evidence indicates multi-tool responses can be effective; CFMs can change flow composition to less risky instruments; FXI affects exchange rates at least in the short run.
  - Empirical work also highlights potential costs not captured in models: FX debt buildup, weakened central bank credibility, slowed market development, and multilateral spillovers.
- The IPF provides broad principles and helps quantify tradeoffs, but judgment remains essential. Developing safeguards and suitable metrics to distinguish appropriate from inappropriate deployment of IPF tools is necessary.

*Source: ppea2020046 - 44. Benefits of additional instruments increase when monetary policy faces a lower bound*

### 63. Taken together, both the models and empirical analysis suggests that precautionary

### 63. Taken together, both the models and empirical analysis suggests that precautionary

### Key analytical findings on CFMs, FXI, and the IPF
- Precautionary CFMs may enhance financial stability under certain conditions.
- CFMs may help reduce the buildup of vulnerabilities, particularly where MPMs cannot curtail the accumulation of risky liabilities.
- The model in the paper weighs these benefits against the cost of distorting capital flows, but notes that costs that are not modeled also need to be taken into account.
- The model results indicate that these measures should be adjusted in response to evolving financial risks, but calibrating and communicating these adjustments could present significant challenges in practice.
- IPF results clarify circumstances when FXI is useful:
  - Simple recipes such as limiting FXI only to cases of disorderly market conditions may be too restrictive.
  - The analysis does not suggest that FXI is the right approach for all countries in all circumstances—fully flexible exchange rate adjustment is appropriate in many situations.
  - Fully flexible exchange rate adjustment is generally appropriate for countries with floating currencies that have deep FX markets and uninterrupted access to foreign capital.
  - FXI may be costly and ineffective when a shock necessitates a permanent adjustment in the real exchange rate and there are no financial stability benefits from smoothing it.
- The IPF provides a realistic model incorporating relevant frictions for EDMEs and a rich analytical framework that can be expanded to incorporate additional frictions and applied across income groups.
- By articulating a consistent framework for using multiple tools, the IPF can help central banks improve communication and build credibility.
- The Fund can provide technical assistance to help countries implement richer quantitative models.

### Policy implications and next steps for the IPF and Fund work
- The IPF can advance Fund surveillance and help the Fund’s members in a variety of ways:
  - Enhances the Fund’s ability to execute its mandate to assess members’ exchange rate and other economic and financial policies in an integrated manner.
  - Facilitates consistent surveillance across AEs and EDMEs by allowing a systematic approach across income groups.
  - Provides a consistent framework for using multiple tools to support central bank communication and credibility-building.
- Future analytical work and operationalization priorities include:
  - Further refining and enriching the conceptual model.
  - Expanding various versions of the quantitative model and calibrating them to individual countries.
  - Considering how IPF findings might be operationalized through development of appropriate metrics—and, where applicable, transparent and implementable policy rules.
  - Continued review of accumulated country experience using IPF tools.
  - Conducting additional empirical work, including on effectiveness of jointly implementing IPF policies and the tradeoffs between short and long term.
  - Engaging with the authorities, academia, and other experts and stakeholders on IPF issues, sharing views, analysis and experiences.
  - Helping countries develop their frameworks through technical assistance and training.
- Two areas singled out for further investigation are fiscal policy and multilateral aspects.
- The analytical findings are not intended to be a new Fund policy but to help inform the upcoming review of the Fund’s Institutional View.
  - The Institutional View on the Liberalization and Management of Capital Flows (IMF, 2012b) was adopted in response to the IMFC’s call for “further work on a comprehensive, flexible, and balanced approach for the management of capital flows.”
  - The IV is subject to periodic reviews; the last took place in 2016 (IMF, 2016).
  - Changes to that policy framework could be considered during the forthcoming review of the IV, tentatively scheduled for 2021.
  - The work on the IPF will be a key input for this review, along with a report by the IEO on the IMF Advice on Capital Flows.

### Select country experiences responding to external shocks (Annex I)
- Case coverage: Brazil, Indonesia, Korea, Mexico, Peru, Thailand (all with inflation targeting regimes) and Malaysia; discussions occurred in 2018 and 2019.
- Objectives of the case discussions:
  - Better understand multiple policy objectives targeted by policymakers.
  - Identify instruments deployed to meet those objectives.
  - Assess consistency of policies with IT regimes.
  - Evaluate unintended consequences.
- Observed policy choices and tradeoffs:
  - Some countries deployed multiple instruments simultaneously; others substituted instruments based on perceived effectiveness.
  - Brazil and Peru used FXI, CFMs and MPMs mostly in combination, allowing monetary policy some independence to focus on price stability.
  - CFMs were in some cases calibrated symmetrically over the cycle; MPMs were mostly used in inflow episodes.
  - Monetary policy decisions also reflected external considerations (e.g., maintaining attractiveness to capital inflows in Indonesia and Mexico) and financial stability concerns (e.g., Thailand’s higher policy rates amid household and corporate indebtedness).
  - FX intervention was prominent in many cases to influence exchange rate appreciation (Korea, Thailand), accumulate reserves opportunistically (notably following the GFC), and prevent disorderly depreciation (Malaysia, Mexico).
  - Strategies reflect history and legacies (Asian crisis in Indonesia, Korea, Thailand; Tequila crisis in Mexico; hyperinflation in Peru), perceptions of central bank behavior (Brazil), indexation legacies, high dollarization (Peru), and fragile private balance sheets (Malaysia, Thailand).
- Outcomes and costs:
  - Diverse approaches generally coincided with benign macroeconomic outcomes, though not always guided by clear frameworks and entailed costs.
  - More intensive use of FXI does not seem to have led to worse inflation outcomes when compared to countries seen as pure inflation targeters.
  - Discussants suggested possible links between these policies and lower levels of financial development (Indonesia, Peru), potential weakening of central bank policy credibility (Thailand), and central bank accountability and communication challenges (Brazil, Indonesia).

### Empirical results on IPF policy tools (Annex II)
- Instrument categories summarized: Macroprudential Measures (MPMs); Foreign Exchange Intervention (FXI); Capital Flow Management Measures (CFMs).
- Primary uses
  - MPMs:
    - Control domestic credit
  - FXI:
    - Build precautionary FX reserves
    - Mute volatility in shallow FX markets
    - Mitigate currency mismatch risks
    - Control inflation
    - Curb exchange rate misalignments
  - CFMs:
    - Manage capital in/outflows or flows in specific asset classes
    - Alter composition of flows
- Effectiveness
  - MPMs:
    - Reduce domestic buildup of vulnerabilities from easy global financial conditions
    - Cost to output seem small
    - Affects exchange rate in short run
    - May help manage capital flows
  - FXI:
    - Adequate reserves reduce vulnerabilities
    - Can change composition of flows
    - May impact overall size of flows, but this is less clear
  - CFMs:
    - Precautionary CFMs can help contain financial stability risks from surges
    - Less evidence for reactive use
- Unintended consequences and spillovers
  - MPMs:
    - Can “leak” via credit provision by nonbanks and from abroad
    - May enhance resilience of other countries
    - May induce higher FX borrowing
    - Might impact central bank credibility, but evidence is weak
  - FXI:
    - Tend to be “sticky”
    - Limited evidence on growth impact
    - Can deflect capital flows to other countries
- Policy interactions
  - MPMs may help increase monetary policy autonomy.
  - MPMs help limit exchange rate appreciation associated with fast credit growth.
  - Combinations of monetary policy and FXI can help smooth the impact of external financing shocks.
  - MPMs can enhance FXI effectiveness and reduce leakage from CFMs and dampen feedback effects.

### Issues for discussion (as presented)
- Do Directors agree that the IPF offers valuable analytical insights into how country characteristics, initial conditions, and the nature of shocks affect whether the use of multiple policy tools is warranted?
- Do Directors agree that the analysis highlights how monetary autonomy and financial stability can be enhanced under certain conditions by the use of multiple tools?
- Do Directors agree that the paper highlights the main tradeoffs in the use of multiple tools? Do they see other considerations that could be relevant?
- Do Directors agree that there is a need for safeguards and judgment in the application of multiple tools?

*Source: Excerpt from the IMF paper section and annexes on the Integrated Policy Framework and country experiences.*

### References

### References

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- Kearns, J., and N. Patel, 2016, “Does the Financial Channel of Exchange Rates Offset the Trade Channel?” BIS Quarterly Review, Bank for International Settlements, (December).  
- Nier, E., T. T. Olafsson, and Y. G. Rollinson, 2020, “Exchange Rates, Domestic Credit and Macroprudential Policy,” IMF Working Paper No. 20/187 (Washington: International Monetary Fund).  
- Richter, B., M. Schularick, and I. Shim, 2018, “The Costs of Macroprudential Policy,” NBER Working Paper No. 24989 (Cambridge, MA: National Bureau of Economic Research).  
- McCann, F. and C. O’Toole, 2019, “Cross-Border Macroprudential Policy Spillovers and Bank Risk-Taking,” International Journal of Central Banking, (October).  
- Aikman, D., A. G. Haldane and B. D. Nelson, 2015, “Curbing the Credit Cycle,” Economic Journal, Vol. 125(585), pp. 1072–109.

### Monetary policy frameworks, spillovers, and international financial cycles
- Adrian, T., J. C. Erceg, J. Lindé, P. Zabczyk, and J. Zhou, 2020, “A Quantitative Model for the Integrated Policy Framework,” IMF Working Paper No. 20/122 (Washington: International Monetary Fund).  
- Basu, S., E. Boz, G. Gopinath, F. Roch, and F. Unsal, 2020, “A Conceptual Model for the Integrated Policy Framework,” IMF Working Paper No. 20/121 (Washington: International Monetary Fund).  
- Bayoumi, T., G. Dell'Ariccia, K. Habermeier, T. Mancini Griffoli, and F. Valencia, 2014, “Monetary Policy in the New Normal,” IMF Staff Discussion Note No. 14/3 (Washington: International Monetary Fund).  
- Carney, M., 2019, “Pull, Push, Pipes: Sustainable Capital Flows for a New World Order,” Speech at the 2019 Institute of International Finance Spring Membership Meeting, June (Tokyo).  
- Carstens, A., 2019, “Exchange Rates and Monetary Policy Frameworks in Emerging Market Economies,” Lecture at the London School of Economics, May (London).  
- Cecchetti, S. G., M. Narita, U. Rawat, and R. Sahay, forthcoming, “International Spillovers of "Lower for Longer" U.S. Interest Rates: Can They be Mitigated?” (Washington: International Monetary Fund).  
- Chen, J., T. Mancini-Griffoli, and R. Sahay, 2014, “Spillovers from U.S. Monetary Policy on Emerging Markets: Different this Time?” IMF Working Paper No. 14/240 (Washington: International Monetary Fund).  
- Gopinath, G., E. Boz, C. Casas, F. J. Díez, P-O. Gourinchas, and M. Plagborg-Møller, 2020, “Dominant Currency Paradigm,” American Economic Review, Vol. 110(3), pp. 677–719.  
- Gopinath, G., 2015, “The International Price System,” Jackson Hole Symposium, Vol. 27, Federal Reserve Bank of Kansas City.  
- Obstfeld, M., 2015, "Trilemmas and Tradeoffs: Living with Financial Globalization," Central Banking, Analysis, and Economic Policies Book Series, ed. by C. Raddatz, D. Saravia, and J. Ventura, Global Liquidity, Spillovers to Emerging Markets and Policy Responses, Ed. 1, Vol. 20, Ch. 2, pp. 013-078, Central Bank of Chile.  
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- Rey, Hélène, 2015, “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence,” NBER Working Paper No. 21162 (Cambridge, MA: National Bureau of Economic Research).  
- Rey, H., 2019, “A Tie that Binds: Revisiting the Trilemma in Emerging Market Economies,” The Review of Economics and Statistics, Vol. 101(2), pp. 279–293.  
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- Svensson, L. E. O., 2000, “The Zero Lower Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap”, NBER Working Paper 7957 (Cambridge, MA: National Bureau of Economic Research).  
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- Fleming, J. M., 1962, “Domestic Financial Policies Under Fixed and Floating Exchange Rates.” IMF Staff Papers, Vol. 9, pp. 369–379.

### Empirical methods, datasets, and measurement
- Adler, G., K. S. Chang, and Z. Wang, 2020, “Patterns of Foreign Exchange Intervention under Inflation Targeting,” IMF Working Paper No. 20/69 (Washington: International Monetary Fund).  
- Adler, G., K. S. Chang, R. C. Mano and Y. Shao, forthcoming, “Foreign Exchange Intervention: A Dataset of Public Data and Proxies,” IMF Working Paper (Washington: International Monetary Fund).  
- Bhargava, A., R. Bouis, A. Kokenyne, M. Perez Archila, U. Rawat, and R. Sahay, forthcoming, “Anatomy of Capital Controls: A New Dataset,” IMF Working Paper (Washington: International Monetary Fund).  
- Fernández, A., M. W. Klein, A. Rebucci, M. Schindler, and M. Uribe, 2016, "Capital Control Measures: A New Dataset," IMF Economic Review, Vol. 64(3), (Washington: International Monetary Fund).  
- Gelos, G., L. Gornicka, R. Koepke, R. Sahay, and S. Sgherri, 2019, “Capital Flows at Risk: Taming the Ebbs and Flows,” IMF Working Paper No. 19/279 (Washington: International Monetary Fund).  
- Pasricha, G. K., M. Falagiarda, M. Bijsterbosch, and J. Aizenman, 2018, “Domestic and Multilateral Effects of Capital Controls in Emerging Markets,” Journal of International Economics, Vol. 115, pp. 48–58.  
- Quinn, D., M. Schindler, and A. Maria Toyoda, 2011, “Assessing Measures of Financial Openness and Integration,” IMF Economic Review, Vol. 59(3). pp. 488–522, (Washington: International Monetary Fund).  
- Kacperczyk, M., S. Sundaresan, and T. Wang, 2018, “Do Foreign Investors Improve Market Efficiency?” NBER Working Paper No. 24765 (Cambridge, MA: National Bureau of Economic Research).  
- Fratzscher, M., O. Gloede, L. Menkhoff, L. Sarno, and T. Stöhr, 2019, “When Is Foreign Exchange Intervention Effective? Evidence from 33 Countries,” American Economic Journal: Macroeconomics, Vol. 11(1), pp. 132–56.

### Theoretical contributions and broader institutional perspectives
- Bianchi, J., 2011, “Overborrowing and Systemic Externalities in the Business Cycle,” American Economic Review, Vol. 101(7), pp. 3400–3426.  
- Bianchi, J. and E. Mendoza, 2010, “Overborrowing, Financial Crises and ‘Macroprudential’ Taxes,” NBER Working Paper No. 16091 (Cambridge, MA: National Bureau of Economic Research).  
- Collard, F., H. Dellas, B. Diba, and O. Loisel, 2017, “Optimal Monetary and Prudential Policies," American Economic Journal: Macroeconomics, Vol. 9(1), pp. 40–87.  
- Dornbusch, R., 1976, “Expectations and Exchange Rate Dynamics,” Journal of Political Economy, Vol. 84(6), pp. 1161–1176.  
- Farhi, E., and I. Werning, 2016, “A Theory of Macroprudential Policies in the Presence of Nominal Rigidities,” Econometrica, Vol. 84(5), pp. 1645–1704.  
- Gabaix, X., and M. Maggiori, 2015, “International Liquidity and Exchange Rate Dynamics,” The Quarterly Journal of Economics, Vol. 130, pp. 1369–1420.  
- Korinek, A., 2016, “Currency Wars or Efficient Spillovers? A General Theory of International Policy Cooperation,” NBER Working Paper No. 23004 (Cambridge, MA: National Bureau of Economic Research).  
- Korinek, A., 2020, “Managing Capital Flows: Theoretical Advances and IMF Policy Frameworks,” IMF Independent Evaluation Office Background Paper 20-02/01 (Washington: International Monetary Fund).  
- North, D. C., 1990, “Institutions, Institutional Change and Economic Performance,” (New York: Cambridge University Press).  
- North, D. C., 1991, “Institutions,” Journal of Economic Perspectives, Vol. 5 (Winter), pp. 97–112.  
- Rodrik, D., A. Subramanian, and F. Trebbi, 2002, “Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development,” IMF Working Paper 02/189 (Washington: International Monetary Fund).  
- Rodrik, E., 2006, “The Social Cost of Foreign Exchange Reserves,” International Economic Journal, Vol. 20(3), pp. 253–266.  
- Rey, Hélène, 2015, “Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence,” NBER Working Paper No. 21162 (Cambridge, MA: National Bureau of Economic Research).

*Source: References, ppea2020046*

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_Source: https://www.imf.org/-/media/files/publications/pp/2020/english/ppea2020046.pdf_