On the use of Monetary and Macroprudential Policies for Small Open Economies

Author/Editor:

Gülçin Özkan ; Filiz D Unsal

Publication Date:

June 24, 2014

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Series:

Working Paper No. 2014/112

Subject:

Consumption Credit Financial sector policy and analysis Labor Macroprudential policy Macroprudential policy instruments Money National accounts Self-employment

English

Publication Date:

June 24, 2014

ISBN/ISSN:

9781498375429/1018-5941

Stock No:

WPIEA2014112

Pages:

34

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