DP15065 A Quantitative Model for the Integrated Policy Framework

Author(s): Tobias Adrian, Christopher J. Erceg, Jesper Lindé, Pawel Zabczyk, Jianping Zhou
Publication Date: July 2020
Keyword(s): Capital Flow Measures, DSGE model, emerging economies, FX intervention, monetary policy
JEL(s): C54, E52, E58, F41
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15065

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.