Book contents
- Macroprudential Policy and Practice
- Macroeconomic Policy Making
- Macroprudential Policy and Practice
- Copyright page
- Contents
- Contributors
- Introduction
- 1 The Macroeconomics of Macroprudential Policies
- 2 A Liquidity-Based Approach to Macroprudential Policy*
- 3 Financial Intermediation and Monetary and Macroprudential Policies
- 4 The New Art of Central Banking
- 5 The Macroprudential Countercyclical Capital Buffer in Basel III
- 6 On the Use of Monetary and Macroprudential Policies for Small Open Economies
- 7 Capital Flows and Macroprudential Policy
- 8 Macroprudential Policy in a Globalised World
- 9 Systemic Risk of European Banks
- 10 Macroprudential Tools of Systemic Risk Analysis
- 11 When Is Macroprudential Policy Effective?
- 12 Macroprudential Policy
- Index
- References
6 - On the Use of Monetary and Macroprudential Policies for Small Open Economies
Published online by Cambridge University Press: 09 August 2018
Book contents
- Macroprudential Policy and Practice
- Macroeconomic Policy Making
- Macroprudential Policy and Practice
- Copyright page
- Contents
- Contributors
- Introduction
- 1 The Macroeconomics of Macroprudential Policies
- 2 A Liquidity-Based Approach to Macroprudential Policy*
- 3 Financial Intermediation and Monetary and Macroprudential Policies
- 4 The New Art of Central Banking
- 5 The Macroprudential Countercyclical Capital Buffer in Basel III
- 6 On the Use of Monetary and Macroprudential Policies for Small Open Economies
- 7 Capital Flows and Macroprudential Policy
- 8 Macroprudential Policy in a Globalised World
- 9 Systemic Risk of European Banks
- 10 Macroprudential Tools of Systemic Risk Analysis
- 11 When Is Macroprudential Policy Effective?
- 12 Macroprudential Policy
- Index
- References
Summary
This paper explores optimal monetary and macroprudential policy rules for a small open economy under a sudden reversal of capital flows.1 We consider Taylor-type interest rate rules as a function of inflation, output, and credit growth; and a macroprudential instrument as a function of credit growth. We have two key results. First, 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 the output gap and inflation. Moreover, monetary responses to financial market developments under both financial and real shocks generate higher welfare losses than macroprudential responses; pointing to the desirability of delegating “leaning against the wind” squarely to macroprudential policy. Second, we find that the source of borrowing is an important determinant of the desirability of alternative policies: the larger the scale of foreign currency debt, the greater the effectiveness of macroprudential instruments. Given the sizable liability dollarization in emerging economies, this finding provides one explanation why macroprudential policies featured so prominently in their response to the 2008–2009 global financial crisis, in contrast to that in advanced economies.
- Type
- Chapter
- Information
- Macroprudential Policy and Practice , pp. 135 - 161Publisher: Cambridge University PressPrint publication year: 2018
References
Angeloni, I., Faia, E. and Lo Duca, M. (2015). “Monetary policy and risk taking,” Journal of Economic Dynamics and Control, vol 52, 285–307.Google Scholar
Benigno, G., Huigang, C., Christopher, O., Alessandro, R. and Young, E. (2013). “Financial crisis and macroprudential policies,” Journal of International Economics, vol 89, no 2, 453–470.Google Scholar
Bernanke, B. S., Gertler, M. and Gilchrist, S. (1999). “The financial accelerator in a quantitative business cycle framework.” In Taylor, J. B. and Woodford, M. (Eds.), Handbook of Macroeconomics, Vol 1C, Amsterdam: North-Holland, 1341–1393.Google Scholar
Bianchi, J. (2011). “Overborrowing and systemic externalities in the business cycle,” American Economic Review, vol 101, no 7, December, 3400–3426.Google Scholar
Carlstrom, C. and Fuerst, T. (1997). “Agency costs, net worth, and business fluctuations: A computable general equilibrium analysis.” American Economic Review, vol 87, no 5, 893–910.Google Scholar
Cecchetti, S. G. (2008). “Measuring the macroeconomic risks posed by asset price booms.” In Cambell, J. Y. (Ed.), Asset Prices and Monetary Policy. Chicago: University of Chicago Press, 9–34.CrossRefGoogle Scholar
Curdia, V. (2007). Monetary policy under sudden stops. Federal Reserve Bank of New York, Staff Report No. 278.Google Scholar
Curdia, V. (2008). Optimal monetary policy under sudden stops. Federal Reserve Bank of New York, Staff Report no. 323.Google Scholar
De Paoli, B. (2009). “Monetary policy and welfare in a small open economy,” Journal of International Economics, vol 77, no 1, 11–22.Google Scholar
Devereux, M. B., Lane, P. R. and Xu, J. (2006). “Exchange rates and monetary policy in emerging market economies,” The Economic Journal, vol 116, 478–506.Google Scholar
Faia, E. and Monacelli, T. (2007). “Optimal interest rate rules, asset prices and credit frictions,” Journal of Economic Dynamics & Control, vol 31, 3228–3254.Google Scholar
Galí, J. and Monacelli, T. (2005). “Monetary policy and exchange rate volatility in a small open economy,” Review of Economic Studies, vol 72, no 3, 707–734.Google Scholar
Gertler, M. and Karadi, P. (2011). “A model of unconventional monetary policy,” Journal of Monetary Economics, vol 58, 17–34.Google Scholar
Gertler, M., Gilchrist, S. and Natalucci, F. (2007). “External constraints on monetary policy and the financial accelerator,” Journal of Money, Credit and Banking, vol 39, 295–330.Google Scholar
International Monetary Fund (2011). World Economic Outlook: Tensions from the Two-Speed Recovery: Unemployment, Commodities, and Capital Flows. Washington, April.Google Scholar
Jeanne, O. and Korinek, A. (2010). Managing credit booms and busts: A Pigouvian taxation perspective. NBER Working Paper, no 16377.Google Scholar
Kannan, P., Rabanal, P. and Scott, A. (2012). “Monetary and macroprudential policy rules in a model with house price booms,” B.E. Journal of Macroeconomics, Contributions, vol 12, no 1, Article 16.Google Scholar
Lane, P. and Milesi-Ferretti, G. (2003). “International financial integration,” IMF Staff Papers, vol 50, 82–113.CrossRefGoogle Scholar
Lim, C., Columba, F., Costa, A., Kongsamut, P., Otani, A., Saiyid, M., Wezel, T. and Wu, X. (2011). Macroprudential policy: What instruments and how to use them? IMF Working Paper, no.11/238.Google Scholar
Ozkan, G. and Unsal, D. F. (2012). Global financial crisis, financial contagion, and emerging markets. IMF Working Paper, no. 12/293.Google Scholar
Quint, D. and Rabanal, P. (2014). “Monetary and macroprudential policy in an estimated DSGE model of the Euro Area,” International Journal of Central Banking, vol 10, no 2.Google Scholar
Rotemberg, J. (1982). “Sticky prices in the United States,” Journal of Political Economy, vol 90, 1187–1211.Google Scholar
Schmitt-Grohe, S. and Uribe, M. (2007). “Optimal simple and implementable monetary and fiscal rules,” Journal of Monetary Economics, vol 54, no 6, 1702–1725.Google Scholar
Taylor, J., 2008. The financial crisis and the policy responses: An empirical analysis of what went wrong, Keynote Lecture at the Bank of Canada, Ottawa, November.Google Scholar
Unsal, D. F. (2013). “Capital flows and financial stability: Monetary policy and macroprudential responses,” International Journal of Central Banking, vol 9, no 1, 233–285.Google Scholar