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

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  • Goyal, Ashima
  • Verma, Akhilesh K
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.

Suggested Citation

  • Goyal, Ashima & Verma, Akhilesh K, 2023. "Cross border flows, financial intermediation and interactions of policy rules in a small open economy," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 369-393.
    • Handle: RePEc:eee:quaeco:v:89:y:2023:i:c:p:369-393
    DOI: 10.1016/j.qref.2022.10.003
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    More about this item

    Keywords

    DSGE model; Cross border flows; Monetary policy macroprudential regulation;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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