A Conceptual Model for the Integrated Policy Framework

Author/Editor:

Suman S Basu ; Emine Boz ; Gita Gopinath ; Francisco Roch ; Filiz D Unsal

Publication Date:

July 7, 2020

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

In the Mundell-Fleming framework, standard monetary policy and exchange rate flexibility fully insulate economies from shocks. However, that framework abstracts from many real world imperfections, and countries often resort to unconventional policies to cope with shocks, such as COVID-19. This paper develops a model of optimal monetary policy, capital controls, foreign exchange intervention, and macroprudential policy. It incorporates many shocks and allows countries to differ across the currency of trade invoicing, degree of currency mismatches, tightness of external and domestic borrowing constraints, and depth of foreign exchange markets. The analysis maps these shocks and country characteristics to optimal policies, and yields several principles. If an additional instrument becomes available, it should not necessarily be deployed because it may not be the right tool to address the imperfection at hand. The use of a new instrument can lead to more or less use of others as instruments interact in non-trivial ways.

Series:

Working Paper No. 20/121

Subject:

Frequency:

regular

English

Publication Date:

July 7, 2020

ISBN/ISSN:

9781513549729/1018-5941

Stock No:

WPIEA2020121

Format:

Paper

Pages:

157

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