Should monetary policy lean against the wind in a small-open economy? Revisiting the Tinbergen rule
Rogelio De la Peña
No 2021-01, Working Papers from Banco de México
It has been debated whether monetary policy should lean against the wind, i.e., if central banks should also respond to the build-up of financial imbalances. I contribute to the debate by showing that targeting the two policy objectives with a single instrument is more costly for a small-open economy than for a closed one. To this end, I develop a small-open economy DSGE model with the Bernanke-Gertler-Gilchrist financial accelerator that features financial frictions and monopolistic competition in goods markets. I then estimate this model for Mexico to explore the policy regimes yielding the lowest welfare cost. My main finding is that the Tinbergen rule is alive and well. In addition, my model is useful to gauge macroprudential measures effectiveness when discriminating against foreign liabilities.
Keywords: Monetary policy; Macroprudential policies; Leaning against the wind; Tinbergen rule; Capital controls (search for similar items in EconPapers)
JEL-codes: C51 E32 E44 E52 E58 E61 F41 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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