Interest Rate Uncertainty as a Policy Tool

82 Pages Posted: 8 May 2020

See all articles by Fabio Pietro Ghironi

Fabio Pietro Ghironi

University of Washington

Galip Ozhan

Government of Canada - Bank of Canada

Multiple version iconThere are 2 versions of this paper

Date Written: April 2020

Abstract

We study a novel policy tool-interest rate uncertainty-that can be used to discourage inefficient capital inflows and to adjust the composition of external accounts between short-term securities and foreign direct investment (FDI). We identify the trade-offs faced in navigating between external balance and price stability. The interest rate uncertainty policy discourages short-term inflows mainly through portfolio risk and precautionary saving channels. A markup channel generates net FDI inflows under imperfect exchange rate pass-through. We further investigate new channels under different assumptions about the irreversibility of FDI, the currency of export invoicing, risk aversion of outside agents, and effective lower bound in the rest of the world. Under every scenario, uncertainty policy is inflationary.

Keywords: international financial policy, Short-Term and Long-Term Capital Movements, stochastic volatility, Unconventional Monetary Policy

JEL Classification: E32, F21, F32, F38, G15

Suggested Citation

Ghironi, Fabio Pietro and Ozhan, Galip, Interest Rate Uncertainty as a Policy Tool (April 2020). CEPR Discussion Paper No. DP14660, Available at SSRN: https://ssrn.com/abstract=3594292

Fabio Pietro Ghironi (Contact Author)

University of Washington ( email )

Department of Economics
Box 353330
Seattle, WA 98195-3330
United States
206-543-5795 (Phone)

HOME PAGE: http://faculty.washington.edu/ghiro

Galip Ozhan

Government of Canada - Bank of Canada

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