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Monetary and Macroprudential Policies to Manage Capital Flows

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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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    References listed on IDEAS

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    Cited by:

    1. Miho Sunaga, 2017. "Capital Adequacy Requirements and Financial Frictions in a Neoclassical Growth Model," Discussion Papers in Economics and Business 17-21, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    2. Dr. Nihal Bayraktar, 2015. "Importance of Investment Climates for Inflows of Foreign Direct Investment in Developing Countries," Business and Economic Research, Macrothink Institute, vol. 5(1), pages 24-50, June.
    3. Agénor, Pierre-Richard & Alper, Koray & Pereira da Silva, Luiz, 2018. "External shocks, financial volatility and reserve requirements in an open economy," Journal of International Money and Finance, Elsevier, vol. 83(C), pages 23-43.
    4. Agénor, Pierre-Richard & Alper, Koray & Pereira da Silva, Luiz A., 2014. "Sudden floods, macroprudential regulation and stability in an open economy," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 68-100.
    5. Daniel C Hardy & Philipp Hochreiter, 2014. "A Simple Macroprudential Liquidity Buffer," IMF Working Papers 14/235, International Monetary Fund.

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