{
  "title": "Shocks Matter: Managing Capital Flows with Multiple Instruments in Emerging Economies",
  "publication": "IMF Working Papers, June 19, 2020",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2020/06/19/shocks-matter-managing-capital-flows-with-multiple-instruments-in-emerging-economies-49395",
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  "summary": "We study the optimal management of capital flows in a small open economy model with financial frictions and multiple policy instruments. The paper reports two main findings.",
  "sections": [
    {
      "heading": "Overview and research question",
      "content": "- Study setting: small open economy model with financial frictions and multiple policy instruments.\n- Objective: identify optimal management of capital flows using combinations of monetary policy rate, foreign exchange intervention (FXI), and macroprudential policy."
    },
    {
      "heading": "Main findings",
      "content": "- Both foreign exchange intervention (FXI) and macroprudential policies are complementary to the monetary policy rate and can largely reduce inflation and output volatility in a scenario of capital outflows.\n- The optimal policy mix depends on the underlying shock driving capital flows:\n  - FXI plays the leading role in response to foreign interest rate shocks.\n  - Macroprudential policy becomes the prominent tool for domestic risk shocks.\n- Policy implication: calibrate the use of multiple instruments according to the underlying shocks that induce shifts in capital flows."
    },
    {
      "heading": "Policy recommendations and practical implications",
      "content": "- Use FXI as the primary adjustment mechanism when capital flow shifts are driven by foreign interest rate movements.\n- Emphasize macroprudential tightening when capital flow shifts are driven by increases in domestic risk.\n- Coordinate instruments—monetary policy rate, FXI, and macroprudential tools—to reduce inflation and output volatility under capital outflow scenarios.\n- Calibrate instrument intensity and sequencing based on identified shock type to improve stabilization outcomes.\n\nSource: IMF Working Paper \"Shocks Matter: Managing Capital Flows with Multiple Instruments in Emerging Economies\", Ruy Lama and Juan Pablo Medina, June 19, 2020.\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2020/06/19/shocks-matter-managing-capital-flows-with-multiple-instruments-in-emerging-economies-49395"
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    "Authors: Ruy Lama, Juan Pablo Medina",
    "Published: June 19, 2020",
    "Series: IMF Working Papers",
    "Study setting: small open economy model with financial frictions and multiple policy instruments.",
    "Objective: identify optimal management of capital flows using combinations of monetary policy rate, foreign exchange intervention (FXI), and macroprudential policy.",
    "Both foreign exchange intervention (FXI) and macroprudential policies are complementary to the monetary policy rate and can largely reduce inflation and output volatility in a scenario of capital outflows.",
    "The optimal policy mix depends on the underlying shock driving capital flows:",
    "Policy implication: calibrate the use of multiple instruments according to the underlying shocks that induce shifts in capital flows.",
    "Use FXI as the primary adjustment mechanism when capital flow shifts are driven by foreign interest rate movements.",
    "Emphasize macroprudential tightening when capital flow shifts are driven by increases in domestic risk.",
    "Coordinate instruments—monetary policy rate, FXI, and macroprudential tools—to reduce inflation and output volatility under capital outflow scenarios.",
    "Calibrate instrument intensity and sequencing based on identified shock type to improve stabilization outcomes.",
    "**Working Paper**"
  ],
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