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

June 19, 2020

Preview Citation

Format: Chicago

Ruy Lama, and Juan Pablo Medina. Shocks Matter: Managing Capital Flows with Multiple Instruments in Emerging Economies, (USA: International Monetary Fund, 2020) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Capital flows, Capital outflows, Central bank policy rate, Reserve requirements, Self-employment

Keywords: FX intervention, WP

Publication Details

Pages:

44
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/097
Stock No:

WPIEA2020097
ISBN:

9781513545684
ISSN:

1018-5941

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