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

June 24, 2014

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Gülçin Özkan, and Filiz D Unsal. On the use of Monetary and Macroprudential Policies for Small Open Economies, (USA: International Monetary Fund, 2014) accessed November 21, 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 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.

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

Keywords: Asset market development, Asset market misalignment, Consumption, Credit, Credit growth, Emerging, Exchange rate, Financial instability, Foreign currency, Global, Interest rate, Macroprudential measures, Macroprudential policy, Macroprudential policy instruments, Monetary policy, Open economy, Output gap, Productivity shock, Self-employment, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/112
Stock No:

WPIEA2014112
ISBN:

9781498375429
ISSN:

1018-5941

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