A Quantitative Model for the Integrated Policy Framework

Tobias Adrian, Christopher Erceg, Jesper Lindé, Pawel Zabczyk and Jianping Zhou

No 2020/122, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; UIP risk premium; inflation expectation; core CPI; EME formulation; vulnerable EME; EME crisis scenario; exchange rate depreciation; EME economy; output gap; shock transmission; EME policymaker; Return on investment; Inflation; Interest rate parity; Exchange rates; Real exchange rates; Global; Monetary Policy; FX Intervention; Emerging Economies; DSGE Model (search for similar items in EconPapers)
Pages: 56
Date: 2020-07-07
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (26)

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Working Paper: A Quantitative Model for the Integrated Policy Framework (2020)
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