Optimal Policy Mix under Financial Crisis
Delano Villanueva () and
Vincent Lim ()
in Staff Papers from South East Asian Central Banks (SEACEN) Research and Training Centre
This paper examines ex-post solutions to the recent financial crisis. It is noted that the standard prescriptions of budgetary cuts, tax increases, currency depreciation and high interest rates were not effective. To avoid future crisis and in the context of an open capital market, the paper proposes a longer-run policy strategy consisting of a three-pronged approach: (i) use open market operations to neutralise the liquidity impact of capital inflows; (ii) strengthen bank asset-liability management and risk-focused supervision to ensure that capital inflows are invested productively and safely in order to meet calls at any time for capital outflows obligations; and (iii) adopt managed exchange rate policy that is supported by a strong foreign reserve position, sound money and sound banking policies, and a strong fiscal position.
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