A Quantitative Microfounded Model for the Integrated Policy Framework

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A Quantitative Microfounded Model for the Integrated Policy Framework is written by Mr. Tobias Adrian and published by International Monetary Fund. It's available with International Standard Book Number or ISBN identification 1616356537 (ISBN 10) and 9781616356538 (ISBN 13).

We develop a microfounded New Keynesian model to analyze monetary policy and financial stability issues in open economies with financial fragilities and weakly anchored inflation expectations. We show that foreign exchange intervention (FXI) and capital flow management tools (CFMs) can improve monetary policy tradeoffs under some conditions, including by reducing the need for procyclical tightening in response to capital outflow pressures. Moreover, they can be used in a preemptive way to reduce the risk of a “sudden stop” through curbing a buildup in leverage. While these tools can materially improve welfare, mainly by dampening inefficient fluctuations in risk premia, our analysis also highlights potential limitations, including the possibility that their deployment may forestall needed adjustment in the external balance. Finally, our results also emphasize the power of FXIs to provide domestic stimulus in a liquidity trap.