{
  "title": "Capital Flows and Financial Stability: Monetary Policy and Macroprudential Responses",
  "publication": "IMF Working Papers, August 1, 2011",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/capital-flows-and-financial-stability-monetary-policy-and-macroprudential-responses-25153",
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  "summary": "The resumption of capital flows to emerging market economies since mid 2009 has posed two sets of interrelated challenges for policymakers: (i) to prevent capital flows from exacerbating overheating pressures and consequent inflation, and (ii) to minimize the risk that prolonged periods of easy fina",
  "sections": [
    {
      "heading": "Overview",
      "content": "- The resumption of capital flows to emerging market economies since mid 2009 posed two interrelated challenges:\n  - (i) to prevent capital flows from exacerbating overheating pressures and consequent inflation, and\n  - (ii) to minimize the risk that prolonged periods of easy financing conditions will undermine financial stability.\n- Conventional monetary policy retains its role in counteracting overheating and inflation, but there are doubts it is sufficient to guard against financial instability.\n- Increased calls for the development of macroprudential measures with an explicit focus on systemwide financial risks motivate the analysis."
    },
    {
      "heading": "Model and approach",
      "content": "- Analysis conducted in an open economy DSGE model with nominal and real frictions.\n- Focus on the interplay between monetary policy and macroprudential regulations."
    },
    {
      "heading": "Key findings",
      "content": "- Macroprudential measures can usefully complement monetary policy.\n- Even under the \"optimal policy,\" which calls for a rather aggressive monetary policy reaction to inflation, introducing macroprudential measures is found to be welfare improving.\n- Broad macroprudential measures are more effective than measures that discriminate against foreign liabilities (prudential capital controls).\n- Macroprudential measures are not a substitute for an appropriate monetary policy reaction.\n- Macroprudential measures are less useful in helping economic stability under a technology shock."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Continue to use conventional monetary policy to counteract overheating pressures and inflation.\n- Introduce broad macroprudential measures to complement monetary policy and improve welfare outcomes.\n- Avoid relying solely on prudential capital controls that discriminate against foreign liabilities; prefer broader macroprudential instruments.\n- Recognize the limited efficacy of macroprudential measures in the face of technology shocks; ensure monetary policy remains appropriately responsive.\n\n---\n\n Content in this bundle\n\n- wp11189 — Introduction and Model\n  - wp11189 — Introduction and Model (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp11189 — Introduction and Model (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/capital-flows-and-financial-stability-monetary-policy-and-macroprudential-responses-25153"
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    "[Markdown version](/en/publications/wp/issues/2016/12/31/capital-flows-and-financial-stability-monetary-policy-and-macroprudential-responses-25153/index.md)",
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    "Authors: Filiz D Unsal",
    "Published: August 1, 2011",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781462307272.001",
    "The resumption of capital flows to emerging market economies since mid 2009 posed two interrelated challenges:",
    "Conventional monetary policy retains its role in counteracting overheating and inflation, but there are doubts it is sufficient to guard against financial instability.",
    "Increased calls for the development of macroprudential measures with an explicit focus on systemwide financial risks motivate the analysis.",
    "Analysis conducted in an open economy DSGE model with nominal and real frictions.",
    "Focus on the interplay between monetary policy and macroprudential regulations.",
    "Macroprudential measures can usefully complement monetary policy.",
    "Even under the \"optimal policy,\" which calls for a rather aggressive monetary policy reaction to inflation, introducing macroprudential measures is found to be welfare improving.",
    "Broad macroprudential measures are more effective than measures that discriminate against foreign liabilities (prudential capital controls).",
    "Macroprudential measures are not a substitute for an appropriate monetary policy reaction.",
    "Macroprudential measures are less useful in helping economic stability under a technology shock.",
    "Continue to use conventional monetary policy to counteract overheating pressures and inflation.",
    "Introduce broad macroprudential measures to complement monetary policy and improve welfare outcomes.",
    "Avoid relying solely on prudential capital controls that discriminate against foreign liabilities; prefer broader macroprudential instruments.",
    "Recognize the limited efficacy of macroprudential measures in the face of technology shocks; ensure monetary policy remains appropriately responsive.",
    "**_wp11189 — Introduction and Model**"
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