## A Quantitative Model for the Integrated Policy Framework

_IMF Working Papers, July 7, 2020_

## Source details

**Canonical URL:** [A Quantitative Model for the Integrated Policy Framework](https://www.imf.org/en/publications/wp/issues/2020/07/07/a-quantitative-model-for-the-integrated-policy-framework-49555)

## Other formats

- [Markdown version](/en/publications/wp/issues/2020/07/07/a-quantitative-model-for-the-integrated-policy-framework-49555/index.md)
- [Structured JSON version](/en/publications/wp/issues/2020/07/07/a-quantitative-model-for-the-integrated-policy-framework-49555/index.json)
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## Bibliographic details
- Authors: Tobias Adrian, Christopher J. Erceg, Jesper Lindé, Pawel Zabczyk, Jianping Zhou
- Published: July 7, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513549668.001

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### Summary
- Many central banks use multiple policy tools, including foreign exchange intervention (FXI) and capital flow management tools (CFMs), to mitigate effects of volatile capital flows.
- The paper develops an empirically-oriented New Keynesian model to evaluate and quantify how using multiple policy tools can potentially improve monetary policy tradeoffs.
- The model embeds nonlinear balance sheet channels and includes a range of empirically-relevant frictions.
- FXI and CFMs may improve policy tradeoffs under certain conditions:
  - economies with less well-anchored inflation expectations,
  - economies with substantial foreign currency mismatch,
  - economies that are more vulnerable to shocks likely to induce capital outflows and exchange rate pressures.

### Model and Methods
- Framework: empirically-oriented New Keynesian model.
- Key model features:
  - nonlinear balance sheet channels,
  - empirically-relevant frictions (unspecified in the overview but emphasized as included).

### Key Findings and Quantitative Claims
- FXI and CFMs can improve monetary policy tradeoffs under the specific conditions listed above.
- Targeted vulnerabilities identified as amplifiers of effectiveness:
  - less well-anchored inflation expectations,
  - substantial foreign currency mismatch,
  - higher vulnerability to capital-outflow–inducing shocks and exchange rate pressures.

### Policy Implications and Recommendations
- Consider using a combination of FXI and CFMs when:
  - inflation expectations are not well anchored,
  - balance sheets exhibit substantial foreign currency mismatch,
  - the economy is prone to shocks that generate capital outflows and exchange rate pressures.
- Integrated use of multiple instruments can potentially improve monetary policy tradeoffs relative to relying on a single tool.

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## Content in this bundle

- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2020/07/07/a-quantitative-model-for-the-integrated-policy-framework-49555_