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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=41347 (application/pdf)

Related works:
Journal Article: Monetary and Macroprudential Policies to Manage Capital Flows (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2014/030

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().