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Monetary and Macroprudential Policies to Manage Capital Flows

Author

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  • Juan Pablo Medina

    (Universidad Adolfo Ibáñez)

  • Jorge Roldós

    (International Monetary Fund)

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-cumfire- sales amplification mechanism. In response to fluctuations in world interest rates, inflation targeting neutralizes nominal distortions but leads to increased volatility in credit and asset prices. Taylor rules do better, but 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 Taylor rule with an argument on credit growth is not an optimal policy response.

Suggested Citation

  • Juan Pablo Medina & Jorge Roldós, 2018. "Monetary and Macroprudential Policies to Manage Capital Flows," International Journal of Central Banking, International Journal of Central Banking, vol. 14(1), pages 201-257, January.
    • Handle: RePEc:ijc:ijcjou:y:2018:q:0:a:6
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