A Quantitative Model for the Integrated Policy Framework
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Summary:
Many central banks have relied on a range of policy tools, including foreign exchange intervention (FXI) and capital flow management tools (CFMs), to mitigate the effects of volatile capital flows on their economies. We develop an empirically-oriented New Keynesian model to evaluate and quantify how using multiple policy tools can potentially improve monetary policy tradeoffs. Our model embeds nonlinear balance sheet channels and includes a range of empirically-relevant frictions. We show that FXI and CFMs may improve policy tradeoffs under certain conditions, especially for economies with less well-anchored inflation expectations, substantial foreign currency mismatch, and that are more vulnerable to shocks likely to induce capital outflows and exchange rate pressures.
Series:
Working Paper No. 2020/122
Subject:
Exchange rates Financial services Foreign exchange Inflation Interest rate parity National accounts Prices Real exchange rates Return on investment
Frequency:
regular
English
Publication Date:
July 7, 2020
ISBN/ISSN:
9781513549668/1018-5941
Stock No:
WPIEA2020122
Pages:
56
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