Monetary and Macroprudential Policies to Manage Capital Flows

Juan Medina and Jorge Roldos

No 2014/030, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; Capital Inflows; Monetary Policy; Macroprudential Policy; Welfare Analysis; lending intermediary; monetary policy rate; liquidity intermediary; defaulted capital; recovery rate; default rate; liquidity service; lending interest rate; fire-sale price; Reserve requirements; Self-employment; Financial frictions; Central bank policy rate; Inflation targeting (search for similar items in EconPapers)
Pages: 44
Date: 2014-02-12
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Citations: View citations in EconPapers (22)

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Journal Article: Monetary and Macroprudential Policies to Manage Capital Flows (2018)
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