Central Bank Stabilisation Policy when Capital Flows Matter: Instruments, Targets, and Trade-offs

Simple item page
dc.contributor.authorGuender, Alfred
dc.date.accessioned2024-05-20T03:24:39Z
dc.date.available2024-05-20T03:24:39Z
dc.date.issued2024
dc.description.abstractThis paper examines how policy instruments shape the trade-off between core macroeconomic and financial stability in an open economy where speculative capital flows affect financial market conditions. We derive and contrast the target rules that underpin optimal discretionary policy in four different instrument scenarios, each of which involves one, two or three of the following instruments: the policy rate, an interest rate equalisation tool, and intervention in the foreign exchange market. The analysis reveals a one-to-one correspondence between the policy instruments deployed and the number of target rules that guide the optimal policy. Using more instruments leads to simpler target rules, sharper trade-offs, and increased welfare. The three-instrument case produces the same output-inflation trade-off as the canonical closed-economy New Keynesian model and ensures complete insulation from foreign monetary policy and other demand-side shocks.
dc.identifier.citationGuender A (2024). Central Bank Stabilisation Policy when Capital Flows Matter: Instruments, Targets, and Trade-offs. Tallinn, Estonia. Bank of Estonia. 1-50.
dc.identifier.doihttp://doi.org/10.23656/25045520/032024/0213
dc.identifier.urihttps://hdl.handle.net/10092/106990
dc.rightsAll rights reserved unless otherwise stated
dc.rights.urihttp://hdl.handle.net/10092/17651
dc.subjectinstruments
dc.subjecttarget rules
dc.subjecttrade-offs
dc.subjectcapital flows
dc.subjectoptimal policy
dc.subjectwelfare
dc.subjectinsulation
dc.subject.anzsrc35 - Commerce, management, tourism and services::3502 - Banking, finance and investment::350204 - Financial institutions (incl. banking)
dc.titleCentral Bank Stabilisation Policy when Capital Flows Matter: Instruments, Targets, and Trade-offs
dc.typeDiscussion / Working Papers
uc.collegeUC Business School
uc.departmentDepartment of Economics and Finance
Files
Original bundle
Now showing 1 - 1 of 1
Thumbnail Image
Name:
BOE_wp3_2024.pdf
Size:
2.06 MB
Format:
Adobe Portable Document Format
Download
License bundle
Now showing 1 - 1 of 1
No Thumbnail Available
Name:
license.txt
Size:
3.17 KB
Format:
Plain Text
Description:
Download
Collections
Business: Working Papers