A Quantitative Model for the Integrated Policy Framework

By Tobias Adrian, Christopher J. Erceg, Jesper Lindé, Pawel Zabczyk, Jianping Zhou

July 7, 2020

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Tobias Adrian, Christopher J. Erceg, Jesper Lindé, Pawel Zabczyk, and Jianping Zhou. A Quantitative Model for the Integrated Policy Framework, (USA: International Monetary Fund, 2020) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Many central banks have relied on a range of policy tools, including foreign exchange intervention (FXI) and capital flow management tools (CFMs), to mitigate the effects of volatile capital flows on their economies. We develop an empirically-oriented New Keynesian model to evaluate and quantify how using multiple policy tools can potentially improve monetary policy tradeoffs. Our model embeds nonlinear balance sheet channels and includes a range of empirically-relevant frictions. We show that FXI and CFMs may improve policy tradeoffs under certain conditions, especially for economies with less well-anchored inflation expectations, substantial foreign currency mismatch, and that are more vulnerable to shocks likely to induce capital outflows and exchange rate pressures.

Subject: Exchange rates, Financial services, Foreign exchange, Inflation, Interest rate parity, National accounts, Prices, Real exchange rates, Return on investment

Keywords: Core CPI, DSGE Model, EME crisis scenario, EME economy, EME formulation, EME policymaker, Emerging Economies, Exchange rate depreciation, Exchange rates, FX Intervention, Global, Inflation, Inflation expectation, Interest rate parity, Monetary Policy, Output gap, Real exchange rates, Return on investment, Shock transmission, UIP risk premium, Vulnerable EME, WP

Publication Details

Pages:

56
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/122
Stock No:

WPIEA2020122
ISBN:

9781513549668
ISSN:

1018-5941

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