Posted

July 19, 2014 10:04:32 PM

Date

2014-02

Author

Juan Pablo Medina Guzman and Jorge Roldos

Affiliation

IMF Institute for Capacity Development

Title

Monetary and Macroprudential Policies to Manage Capital Flows

Summary /
Abstract

We study interactions between monetary and macroprudential policies in a model with nominal and financial frictions. The latter derive from a financial sector that provides credit and liquidity services that lead to a financial accelerator-cum-fire-sales amplification mechanism. In response to fluctuations in world interest rates, inflation targeting dominates standard Taylor rules, but leads to increased volatility in credit and asset prices. The use of a countercyclical macroprudential instrument in addition to the policy rate improves welfare and has important implications for the conduct of monetary policy. “Leaning against the wind” or augmenting a standard Taylor rule with an argument on credit growth may not be an effective policy response.

Keywords

Monetary policy; Macroprudential Policy; Capital flows; Business cycles; Financial sector; Economic models; Capital Inflows, Monetary Policy, Macroprudential Policy, Welfare Analysis

URL

http://www.imf.org/external/pubs/ft/wp/2014/wp1430.pdf

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