{
  "title": "On the use of Monetary and Macroprudential Policies for Small Open Economies",
  "publication": "IMF Working Papers, June 24, 2014",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/31/on-the-use-of-monetary-and-macroprudential-policies-for-small-open-economies-41673",
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  "summary": "We explore optimal monetary and macroprudential policy rules for a small open economy. Delegating 'lean against the wind' squarely to macroprudential policy provides a more robust policy mix to shock uncertainty—(i) if macroprudential measures exist, there are no significant welfare gains from monetary policy reacting to credit growth under a financial shock; and (ii) monetary responses to financial markets could generate bigger welfare losses than macroprudential responses under different shocks. The source of outstanding liabilities also plays a role in the choice of policy instrument— macroprudential policies are particularly effective for emerging markets where foreign borrowing is sizeable.",
  "authors": [
    "Gülçin Özkan",
    "Filiz D Unsal"
  ],
  "publishDate": "2014-06-24",
  "series": "IMF Working Papers",
  "sections": [
    {
      "heading": "Main findings",
      "content": "- Delegating \"lean against the wind\" squarely to macroprudential policy provides a more robust policy mix to shock uncertainty.\n- If macroprudential measures exist, there are no significant welfare gains from monetary policy reacting to credit growth under a financial shock.\n- Monetary responses to financial markets could generate bigger welfare losses than macroprudential responses under different shocks.\n- The source of outstanding liabilities affects the choice of policy instrument: macroprudential policies are particularly effective for emerging markets where foreign borrowing is sizeable."
    },
    {
      "heading": "Analysis themes",
      "content": "- Interaction of monetary and macroprudential policy rules in a small open economy framework.\n- Comparative welfare outcomes when monetary policy reacts to credit growth versus when macroprudential policy addresses financial imbalances.\n- Role of shock uncertainty in determining robustness of policy mixes.\n- Importance of liability currency/source (domestic vs. foreign) in tailoring macroprudential responses for emerging markets."
    },
    {
      "heading": "Policy recommendations",
      "content": "- Assign primary responsibility for \"leaning against the wind\" to macroprudential policy rather than monetary policy when feasible.\n- Reserve monetary policy responses to financial markets cautiously, given potential for larger welfare losses under certain shocks.\n- Strengthen macroprudential toolkits in emerging markets with sizeable foreign borrowing to improve effectiveness in containing financial vulnerabilities."
    },
    {
      "heading": "Keywords and topics covered",
      "content": "- Consumption; Credit; Financial sector policy and analysis; Labor; Macroprudential policy; Macroprudential policy instruments; Money; National accounts; Self-employment\n- asset market development; asset market misalignment; credit growth; emerging; exchange rate; Financial instability; foreign currency; Global; interest rate; monetary policy; open economy; output gap; productivity shock; Self-employment; WP\n\nGülçin Özkan, and Filiz D Unsal. \"On the use of Monetary and Macroprudential Policies for Small Open Economies\", IMF Working Papers 2014, 112 (2014), June 24, 2014.\n\n---\n\n Content in this bundle\n\n- 2.   The Model\n  - 2.   The Model (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - 2.   The Model (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/on-the-use-of-monetary-and-macroprudential-policies-for-small-open-economies-41673"
    }
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    "Authors: Gülçin Özkan, Filiz D Unsal",
    "Published: June 24, 2014",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781498375429.001",
    "Delegating \"lean against the wind\" squarely to macroprudential policy provides a more robust policy mix to shock uncertainty.",
    "If macroprudential measures exist, there are no significant welfare gains from monetary policy reacting to credit growth under a financial shock.",
    "Monetary responses to financial markets could generate bigger welfare losses than macroprudential responses under different shocks.",
    "The source of outstanding liabilities affects the choice of policy instrument: macroprudential policies are particularly effective for emerging markets where foreign borrowing is sizeable.",
    "Interaction of monetary and macroprudential policy rules in a small open economy framework.",
    "Comparative welfare outcomes when monetary policy reacts to credit growth versus when macroprudential policy addresses financial imbalances.",
    "Role of shock uncertainty in determining robustness of policy mixes.",
    "Importance of liability currency/source (domestic vs. foreign) in tailoring macroprudential responses for emerging markets.",
    "Assign primary responsibility for \"leaning against the wind\" to macroprudential policy rather than monetary policy when feasible.",
    "Reserve monetary policy responses to financial markets cautiously, given potential for larger welfare losses under certain shocks.",
    "Strengthen macroprudential toolkits in emerging markets with sizeable foreign borrowing to improve effectiveness in containing financial vulnerabilities.",
    "Consumption; Credit; Financial sector policy and analysis; Labor; Macroprudential policy; Macroprudential policy instruments; Money; National accounts; Self-employment",
    "asset market development; asset market misalignment; credit growth; emerging; exchange rate; Financial instability; foreign currency; Global; interest rate; monetary policy; open economy; output gap; productivity shock; Self-employment; WP",
    "**2.   The Model**"
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