Monetary and Macroprudential Policies to Manage Capital Flows

IMF Working Papers, February 12, 2014

Source details

Canonical URL

Monetary and Macroprudential Policies to Manage Capital Flows

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Authors: Juan Pablo Medina Guzman, Jorge Roldos
• Published: February 12, 2014
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484302873.001

Study design and model

• Authors: Juan Pablo Medina Guzman, Jorge Roldos
• Date: February 12, 2014
• Model features:
  • Incorporates nominal and financial frictions.
  • Financial sector provides credit and liquidity services.
  • Generates a financial accelerator-cum-fire-sales amplification mechanism.

Main findings

• In response to fluctuations in world interest rates:
  • Inflation targeting dominates standard Taylor rules.
  • Inflation targeting leads to increased volatility in credit and asset prices.
• Use of a countercyclical macroprudential instrument in addition to the policy rate:
  • Improves welfare.
  • 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.

Policy implications and recommendations

• Combine the policy rate with a countercyclical macroprudential instrument to improve welfare and manage capital-flow-induced volatility.
• Relying solely on inflation targeting improves macro stability relative to standard Taylor rules but requires attention to financial stability spillovers (credit and asset price volatility).
• Augmenting Taylor rules with credit-growth terms (leaning against the wind) is unlikely to be effective on its own.

Keywords and subject coverage

• Subject: Central bank policy rate, Economic theory, Financial frictions, Financial services, Inflation targeting, Labor, Monetary policy, Reserve requirements, Self-employment
• Keywords: Capital Inflows, Central bank policy rate, default rate, defaulted capital, Financial frictions, fire-sale price, Inflation targeting, lending interest rate, lending intermediary, liquidity intermediary, liquidity service, Macroprudential Policy, Monetary Policy, monetary policy rate, recovery rate, Reserve requirements, Self-employment, Welfare Analysis, WP

Content in this bundle

• Appendix I. The Lending Problem
  • Appendix I. The Lending Problem (Markdown version)
  • Appendix I. The Lending Problem (PDF)