Monetary and Macroprudential Policies to Manage Capital Flows
45 Pages Posted: 11 Mar 2014
Date Written: February 2014
Abstract
We study interactions between monetary and macroprudential policies in a model with nominal and financial frictions. The latter derive from a financial sector that provides credit and liquidity services that lead to a financial accelerator-cum-fire-sales amplification mechanism. In response to fluctuations in world interest rates, inflation targeting dominates standard Taylor rules, but leads to increased volatility in credit and asset prices. The use of a countercyclical macroprudential instrument in addition to the policy rate improves welfare and has important implications for the conduct of monetary policy. “Leaning against the wind” or augmenting a standard Taylor rule with an argument on credit growth may not be an effective policy response.
Keywords: Monetary policy, Macroprudential Policy, Capital flows, Business cycles, Financial sector, Economic models, Capital Inflows, Welfare Analysis., inflation, reserve requirement, inflation targeting, reserve requirements, aggregate demand, monetary economics, monetary fund, foreign currency, inflation targeting regime, financial stability, monetary authority, central bank, government securities, money balances, real interest rate, monetary policies, inflation rate, real money, real wages, monetary policy instrument, price level, treasury securities, money demand, price inflation, wage inflation
JEL Classification: E44, E52, E61, F41
Suggested Citation: Suggested Citation