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On the use of monetary and macroprudential policies for financial stability in emerging markets

Author

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  • F. Gulcin Ozkan
  • D. Filiz Unsal

Abstract

This paper explores optimal monetary and macroprudential policy rules in an open-economy with significant exposure to external borrowing in the face of a sudden reversal of capital inflows. We consider optimal Taylor-type interest rate rules, where the policy rate is set as a function of inflation, output, and credit growth; and a macroprudential instrument is set as a function of credit growth. We have two key results. First, we find that, in the presence of macroprudential measures, there are no significant welfare gains from monetary policy also reacting to credit growth above and beyond its response to inflation. Thus, from a welfare point of view it is better to delegate ’lean against the wind’ squarely to macroprudential policy. Second, the source of borrowing (domestic versus foreign) plays a crucial role in the choice of policy instrument in responding to credit market developments. When the source of borrowing is external, monetary policy responses required to stabilize financial markets would be unduly large. In contrast, macroprudential instrument can directly influence the cost of credit and ease the fiancial markets. Therefore, emerging economies where foreign borrowing is typically sizeable are likely to find macroprudential measures particularly effective in promoting financial stability.

Suggested Citation

  • F. Gulcin Ozkan & D. Filiz Unsal, 2013. "On the use of monetary and macroprudential policies for financial stability in emerging markets," Discussion Papers 13/14, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:13/14
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    References listed on IDEAS

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    8. Ignazio Angeloni, 2009. "A Tale of Two Policies: Prudential Regulation and Monetary Policy with Fragile Banks," Working Papers 345, Bruegel.
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    Citations

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    Cited by:

    1. Yaprak Tavman, 2015. "A comparative analysis of macroprudential policies," Oxford Economic Papers, Oxford University Press, vol. 67(2), pages 334-355.
    2. Emmanuel Carré & Jézabel Couppey-Soubeyran & Salim Dehmej, 2015. "La coordination entre politique monétaire et politique macroprudentielle. Que disent les modèles dsge ?," Revue économique, Presses de Sciences-Po, vol. 66(3), pages 541-572.
    3. Giovanni Melina & Stefania Villa, 2014. "Leaning Against Windy Bank Lending," BCAM Working Papers 1402, Birkbeck Centre for Applied Macroeconomics.
    4. Juan Pablo Medina Guzman & Jorge Roldos, 2014. "Monetary and Macroprudential Policies to Manage Capital Flows," IMF Working Papers 14/30, International Monetary Fund.

    More about this item

    Keywords

    Financial instability; monetary policy; macroprudential measures; emerging markets; and financial crises;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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