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Title: A Quantitative Model for the Integrated Policy Framework

Author(s): Tobias Adrian, Christopher J. Erceg, Jesper Lindé, Pawel Zabczyk and Jianping Zhou

Publication Date: July 2020

Keyword(s): Capital Flow Measures, DSGE model, emerging economies, FX intervention and monetary policy

Programme Area(s): International Macroeconomics and Finance

Abstract: 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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Bibliographic Reference

Adrian, T, Erceg, C, Lindé, J, Zabczyk, P and Zhou, J. 2020. 'A Quantitative Model for the Integrated Policy Framework'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15065