## A Conceptual Model for the Integrated Policy Framework

_IMF Working Papers, July 7, 2020_

## Source details

**Canonical URL:** [A Conceptual Model for the Integrated Policy Framework](https://www.imf.org/en/publications/wp/issues/2020/07/07/a-conceptual-model-for-the-integrated-policy-framework-49558)

## Other formats

- [Markdown version](/en/publications/wp/issues/2020/07/07/a-conceptual-model-for-the-integrated-policy-framework-49558/index.md)
- [Structured JSON version](/en/publications/wp/issues/2020/07/07/a-conceptual-model-for-the-integrated-policy-framework-49558/index.json)
- [Bundle manifest](/en/publications/wp/issues/2020/07/07/a-conceptual-model-for-the-integrated-policy-framework-49558/bundle-manifest.json)

## Bibliographic details
- Authors: Suman S Basu, Emine Boz, Gita Gopinath, Francisco Roch, Filiz D Unsal
- Published: July 7, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513549729.001

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### Overview and purpose
- Paper develops a model of optimal monetary policy, capital controls, foreign exchange intervention, and macroprudential policy.
- Incorporates many shocks and allows countries to differ across:
  - currency of trade invoicing,
  - degree of currency mismatches,
  - tightness of external and domestic borrowing constraints,
  - depth of foreign exchange markets.
- Maps shocks and country characteristics to optimal policies and derives guiding principles for instrument use.

### Key findings and principles
- In the Mundell-Fleming framework, standard monetary policy and exchange rate flexibility fully insulate economies from shocks; however, that framework abstracts from many real world imperfections.
- Countries often resort to unconventional policies to cope with shocks, such as COVID-19.
- If an additional instrument becomes available, it should not necessarily be deployed because it may not be the right tool to address the imperfection at hand.
- The use of a new instrument can lead to more or less use of others as instruments interact in non-trivial ways.

### Model features and heterogeneity
- Model integrates multiple policy instruments:
  - monetary policy (central bank policy rate),
  - capital controls,
  - foreign exchange intervention (FX intervention),
  - macroprudential policy (prudential tax, housing constraint considerations).
- Country heterogeneity explicitly modeled across:
  - currency of trade invoicing,
  - degree of currency mismatches,
  - tightness of external borrowing constraints,
  - tightness of domestic borrowing constraints,
  - depth of foreign exchange markets.

### Policy implications and recommendations
- Instrument selection should be guided by the specific imperfection or shock; availability alone is not sufficient reason for deployment.
- Policymakers should account for interactions among instruments, since deploying one instrument may change optimal use of others.
- Optimal policy design requires accounting for:
  - exchange rate dynamics and exchange rate flexibility,
  - currency markets and foreign exchange considerations,
  - housing sector vulnerabilities and housing-related constraints,
  - financial markets depth and structure.

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## Content in this bundle

- **Working Paper**
  - [Working Paper (Markdown version)](/-/media/files/publications/wp/2020/english/wpiea2020121-print-pdf.pdf.md){rel="alternate" type="text/markdown"}
  - [Working Paper (PDF)](/-/media/files/publications/wp/2020/english/wpiea2020121-print-pdf.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2020/07/07/a-conceptual-model-for-the-integrated-policy-framework-49558_