On the Use of Monetary and Macroprudential Policies for Small Open Economies
35 Pages Posted: 18 Jul 2014
Date Written: June 2014
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.
Keywords: Macroprudential Policy, Monetary policy, Small open economies, Emerging markets, Entrepreneurship, External borrowing, Financial stability, Econometric models, Financial instability, macroprudential measures, emerging, inflation, foreign currency, monetary fund, monetary economics, macroeconomic stability, central bank, cost of credit, monetary policy rule, nominal interest rate, monetary instrument, aggregate demand, foreign exchange, price level, monetary policy instrument, price stability, monetary authority, fall in inflation, lower inflation, low inflation, optimal monetary policy, monetary stability, monetary responses, rise in inflation, real variables
JEL Classification: E50, F4, F3
Suggested Citation: Suggested Citation