## 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](https://www.imf.org/en/publications/wp/issues/2016/12/31/monetary-and-macroprudential-policies-to-manage-capital-flows-41347)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/31/monetary-and-macroprudential-policies-to-manage-capital-flows-41347/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/31/monetary-and-macroprudential-policies-to-manage-capital-flows-41347/index.json)
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## 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

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### 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

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## Content in this bundle

- **Appendix I. The Lending Problem**
  - [Appendix I. The Lending Problem (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp1430.pdf.md){rel="alternate" type="text/markdown"}
  - [Appendix I. The Lending Problem (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp1430.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/monetary-and-macroprudential-policies-to-manage-capital-flows-41347_