A Conceptual Model for the Integrated Policy Framework

158 Pages Posted: 12 Aug 2020

See all articles by Suman Sambha Basu

Suman Sambha Basu

International Monetary Fund (IMF)

Emine Boz

International Monetary Fund (IMF)

Gita Gopinath

International Monetary Fund (IMF); Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Francisco Roch

International Monetary Fund (IMF)

D. Filiz Unsal

International Monetary Fund (IMF) - Research Department

Date Written: July 1, 2020

Abstract

In the Mundell-Fleming framework, standard monetary policy and exchange rate flexibility fully insulate economies from shocks. However, that framework abstracts from many real world imperfections, and countries often resort to unconventional policies to cope with shocks, such as COVID-19. This paper develops a model of optimal monetary policy, capital controls, foreign exchange intervention, and macroprudential policy. It incorporates many shocks and allows countries to differ across the currency of trade invoicing, degree of currency mismatches, tightness of external and domestic borrowing constraints, and depth of foreign exchange markets. The analysis maps these shocks and country characteristics to optimal policies, and yields several principles. If an additional instrument becomes available, it should not necessarily be deployed because it may not be the right tool to address the imperfection at hand. The use of a new instrument can lead to more or less use of others as instruments interact in non-trivial ways.

Keywords: Exchange markets, Foreign exchange reserves, Capital controls, Central banks, Foreign exchange intervention, exchange rate flexibility, monetary policy, macroprudential regulation, WP, capital control, house sector, DCP, ex ante, premia

JEL Classification: F31, F32, F38, F41, E01, O24, F16, E52, G21

Suggested Citation

Basu, Suman Sambha and Boz, Emine and Gopinath, Gita and Roch, Francisco and Unsal, D. Filiz, A Conceptual Model for the Integrated Policy Framework (July 1, 2020). IMF Working Paper No. 20/121, Available at SSRN: https://ssrn.com/abstract=3670604

Suman Sambha Basu (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Emine Boz

International Monetary Fund (IMF)

Gita Gopinath

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Francisco Roch

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

D. Filiz Unsal

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

700 19th Street NW
Washington, DC 20431
United States

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