Do Capital Flows Matter for Monetary Policy Setting in Inflation Targeting Economies?

Trinil Arimurti and Bruce Morley
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Trinil Arimurti: Department of Economics, University of Bath, Bath B2A 7AY, UK

JRFM, 2020, vol. 13, issue 7, 1-15

Abstract: The aim of this study is to determine if capital flows can account for the international effects on domestic monetary policy, using an augmented Taylor rule model. In addition to the standard determinants of nominal interest rates, we include capital flow measures to show how central banks consider this important factor when deciding on the most appropriate monetary policy. Using a panel of inflation targeting economies and the dynamic panel approach, this study finds that capital inflows and outflows are an important determinant of nominal interest rates.

Keywords: capital flow; Taylor rule; interest rate (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2020
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