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

Gulcin Ozkan and Filiz Unsal

No 2014/112, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; monetary policy; interest rate; exchange rate; Financial instability; macroprudential measures; emerging; productivity shock; output gap; asset market misalignment; credit growth; asset market development; foreign currency; open economy; Macroprudential policy; Credit; Macroprudential policy instruments; Consumption; Self-employment; Global (search for similar items in EconPapers)
Pages: 34
Date: 2014-06-24
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Citations: View citations in EconPapers (28)

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