Monetary and Macroprudential Policies to Manage Capital Flows

By Juan Pablo Medina Guzman, Jorge Roldos

February 12, 2014

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Format: Chicago

Juan Pablo Medina Guzman, and Jorge Roldos. Monetary and Macroprudential Policies to Manage Capital Flows, (USA: International Monetary Fund, 2014) accessed December 4, 2024

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 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.

Subject: Central bank policy rate, Economic theory, Financial frictions, Financial services, Inflation targeting, Labor, Monetary policy, Reserve requirements, Self-employment

Keywords: Capital Inflows, Central bank policy rate, Default rate, Defaulted capital, Financial frictions, Fire-sale price, Inflation targeting, Lending interest rate, Lending intermediary, Liquidity intermediary, Liquidity service, Macroprudential Policy, Monetary Policy, Monetary policy rate, Recovery rate, Reserve requirements, Self-employment, Welfare Analysis, WP

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/030
Stock No:

WPIEA2014030
ISBN:

9781484302873
ISSN:

1018-5941

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