On the use of Monetary and Macroprudential Policies for Small Open Economies
IMF Working Papers, June 24, 2014
Source details
- Canonical URL
- On the use of Monetary and Macroprudential Policies for Small Open Economies
Other formats
Bibliographic details
- Authors: Gülçin Özkan, Filiz D Unsal
- Published: June 24, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498375429.001
Main findings
- Delegating "lean against the wind" squarely to macroprudential policy provides a more robust policy mix to shock uncertainty.
- If macroprudential measures exist, there are no significant welfare gains from monetary policy reacting to credit growth under a financial shock.
- Monetary responses to financial markets could generate bigger welfare losses than macroprudential responses under different shocks.
- The source of outstanding liabilities affects the choice of policy instrument: macroprudential policies are particularly effective for emerging markets where foreign borrowing is sizeable.
Analysis themes
- Interaction of monetary and macroprudential policy rules in a small open economy framework.
- Comparative welfare outcomes when monetary policy reacts to credit growth versus when macroprudential policy addresses financial imbalances.
- Role of shock uncertainty in determining robustness of policy mixes.
- Importance of liability currency/source (domestic vs. foreign) in tailoring macroprudential responses for emerging markets.
Policy recommendations
- Assign primary responsibility for "leaning against the wind" to macroprudential policy rather than monetary policy when feasible.
- Reserve monetary policy responses to financial markets cautiously, given potential for larger welfare losses under certain shocks.
- Strengthen macroprudential toolkits in emerging markets with sizeable foreign borrowing to improve effectiveness in containing financial vulnerabilities.
Keywords and topics covered
- Consumption; Credit; Financial sector policy and analysis; Labor; Macroprudential policy; Macroprudential policy instruments; Money; National accounts; Self-employment
- asset market development; asset market misalignment; credit growth; emerging; exchange rate; Financial instability; foreign currency; Global; interest rate; monetary policy; open economy; output gap; productivity shock; Self-employment; WP
Gülçin Özkan, and Filiz D Unsal. "On the use of Monetary and Macroprudential Policies for Small Open Economies", IMF Working Papers 2014, 112 (2014), June 24, 2014.
Content in this bundle
- 2. The Model