Cross border flows, financial intermediation and interactions of policy rules in a small open economy

The Quarterly Review of Economics and Finance, 2023, vol. 89, issue C, 369-393

Abstract: We investigate the interaction between monetary policy (MP) and macroprudential regulations (MaPs) in a small open emerging economy, using a New Keynesian DSGE model with financial intermediation. We show that an augmented Taylor rule (ATR), is inadequate to absorb negative shocks due to the conflict between inflation and exchange rate stabilization. However, two kinds of MaP regulations along with a simple monetary policy rule improve the business cycle dynamics and welfare under domestic and external shocks relative to ATR. The two macroprudential regulations analysed are relevant respectively for a ‘sudden stop’ type external shock or a banking crisis type domestic shock, which are frequent in such economies, and are found to improve macroeconomic stability.

Keywords: DSGE model; Cross border flows; Monetary policy macroprudential regulation (search for similar items in EconPapers)
JEL-codes: E44 E52 E61 F42 G28 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:89:y:2023:i:c:p:369-393

DOI: 10.1016/j.qref.2022.10.003

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