Discussion paper

DP15065 A Quantitative Model for the Integrated Policy Framework

Many central banks have relied on a range of policy tools, including foreign exchange intervention (FXI) and capital flow management tools (CFMs), to mitigate the effects of volatile capital flows on their economies. We develop an empirically-oriented New Keynesian model to evaluate and quantify how using multiple policy tools can potentially improve monetary policy tradeoffs. Our model embeds nonlinear balance sheet channels and includes a range of empirically-relevant frictions. We show that FXI and CFMs may improve policy tradeoffs under certain conditions, especially for economies with less well-anchored inflation expectations, substantial foreign currency mismatch, and that are more vulnerable to shocks likely to induce capital outflows and exchange rate pressures.

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Citation

Adrian, T, C Erceg, J Linde, P Zabczyk and J Zhou (eds) (2020), “DP15065 A Quantitative Model for the Integrated Policy Framework”, CEPR Press Discussion Paper No. 15065. https://new.cepr.org/publications/dp15065