Macro-prudential policies, the global financial cycle and the real exchange rate

Alice Y. Ouyang and Shen Guo

Journal of International Money and Finance, 2019, vol. 96, issue C, 147-167

Abstract: This paper examines whether a global financial cycle originating from center economies affects the real exchange rates in peripheral economies and to what extent macro-prudential policies can isolate peripheral economies from this external shock. We build a dynamic stochastic general equilibrium (DSGE) model to describe how macro-prudential policies mitigate the fluctuations of the real exchange rate in a small open economy in response to external shocks, in which households are subject to liquidity constraints. Using a sample of 37 emerging and small advanced economies, we show that a counter-cyclical macro-prudential policy implementation is effective in mitigating the fluctuations in the real exchange rates caused by a U.S. interest rate shock.

Keywords: Macro-prudential policies; Global financial cycle; Real exchange rate; U.S. interest rate; Global liquidity; Reserve requirement; Loan-to-value ratio (search for similar items in EconPapers)
JEL-codes: E44 F41 F42 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:96:y:2019:i:c:p:147-167

DOI: 10.1016/j.jimonfin.2019.05.009

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