An Integrated Policy Framework (IPF) Diagram for International Economics

IMF Working Papers, February 23, 2024

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An Integrated Policy Framework (IPF) Diagram for International Economics

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Bibliographic details

• Authors: Suman S Basu, Gita Gopinath
• Published: February 23, 2024
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9798400268274.001

Overview and motivation

• The Mundell-Fleming IS-LM approach has guided generations of economists over the past 60 years, but new country experiences, advances in the international finance literature, and changes in the composition of the global economy motivate an updated approach.
• The paper proposes an Integrated Policy Framework (IPF) diagram to analyze the use of multiple policy tools as a function of shocks and country characteristics.

Model features and core mechanisms

• Underlying model features:
  • dominant currency pricing
  • shallow foreign exchange (FX) markets
  • occasionally-binding external and domestic borrowing constraints
• Policy tools incorporated in the diagram:
  • monetary policy
  • FX intervention
  • capital controls
  • domestic macroprudential measures
• Extended diagram:
  • adds fiscal policy into the mix

Structure of the IPF diagram and trade-offs analyzed

• The diagram has four panels to explore four key trade-offs related to:
  • import consumption
  • home goods consumption
  • the housing market
  • monetary policy

Main contributions and implications

• Provides a framework to analyze the optimal combination and sequencing of multiple policy instruments across different shock scenarios and country characteristics.
• Captures frictions relevant for open-economy macroprudential and monetary interactions: dominant currency pricing, FX market depth, and occasionally-binding borrowing constraints.
• Emphasizes interactions between exchange rate arrangements, capital flows, macroprudential policy, and fiscal policy in an integrated visual and analytical tool.

Subject keywords and topical focus

• Subject: Exchange rate arrangements, Exchange rates, External debt, Foreign exchange, Imports, International trade, Land prices, Prices
• Keywords: borrowing constraint, capital controls, Exchange rate arrangements, Exchange rates, fiscal policy, foreign exchange intervention, FX intervention, Global, Imports, integrated policy framework, international economics, IPF diagram, Land prices, macroprudential policy, monetary policy, shallow foreign exchange, supply curve

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