On the use of Monetary and Macroprudential Policies for Small Open Economies
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Summary:
We explore optimal monetary and macroprudential policy rules for a small open economy. Delegating 'lean against the wind' squarely to macroprudential policy provides a more robust policy mix to shock uncertainty—(i) if macroprudential measures exist, there are no significant welfare gains from monetary policy reacting to credit growth under a financial shock; and (ii) monetary responses to financial markets could generate bigger welfare losses than macroprudential responses under different shocks. The source of outstanding liabilities also plays a role in the choice of policy instrument— macroprudential policies are particularly effective for emerging markets where foreign borrowing is sizeable.
Series:
Working Paper No. 2014/112
Subject:
Consumption Credit Financial sector policy and analysis Labor Macroprudential policy Macroprudential policy instruments Money National accounts Self-employment
English
Publication Date:
June 24, 2014
ISBN/ISSN:
9781498375429/1018-5941
Stock No:
WPIEA2014112
Pages:
34
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