On the Use of Monetary and Macroprudential Policies for Small Open Economies

35 Pages Posted: 18 Jul 2014

See all articles by F. Gulcin Ozkan

F. Gulcin Ozkan

University of York

D. Filiz Unsal

International Monetary Fund (IMF) - Research Department

Date Written: June 2014

Abstract

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

Ozkan, F. Gulcin and Unsal, D. Filiz, On the Use of Monetary and Macroprudential Policies for Small Open Economies (June 2014). IMF Working Paper No. 14/112, Available at SSRN: https://ssrn.com/abstract=2468017

F. Gulcin Ozkan (Contact Author)

University of York ( email )

Heslington
University of York
York, YO10 5DD
United Kingdom

D. Filiz Unsal

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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