Shocks Matter: Managing Capital Flows with Multiple Instruments in Emerging Economies

Shocks Matter: Managing Capital Flows with Multiple Instruments in Emerging Economies
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Volume/Issue: Volume 2020 Issue 097
Publication date: June 2020
ISBN: 9781513545684
$18.00
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Topics covered in this book

This title contains information about the following subjects. Click on a subject if you would like to see other titles with the same subjects.

Banks and Banking , Exports and Imports , Labor , Money and Monetary Policy , WP , FX intervention

Summary

We study the optimal management of capital flows in a small open economy model with financial frictions and multiple policy instruments. The paper reports two main findings. First, both foreign exchange intervention (FXI) and macroprudential polices are tools complementary to the monetary policy rate that can largely reduce inflation and output volatility in a scenario of capital outflows. Second, the optimal policy mix depends on the underlying shock driving capital flows. FXI takes the leading role in response to foreign interest rate shocks, while macroprudential policy becomes the prominent tool for domestic risk shocks. These results highlight the importance of calibrating the use of multiple instruments according to the underlying shocks that induce shifts in capital flows.