Working Paper: CEPR ID: DP15693
Authors: Luis Brando-Marques; Gaston Gelos; Machiko Narita; Erlend Nier
Abstract: This paper takes a new approach to assess the benefits of using different policy tools—macroprudential and monetary policies, foreign exchange interventions, and capital controls—in response to changes in financial conditions. Starting from quantile regressions, we evaluate policies across the full distribution of future output growth and inflation using loss functions. Tightening macroprudential policy dampens downside risks to growth from loose financial conditions, and is beneficial in net terms. By contrast, tightening monetary policy entails net losses. These findings also hold when reacting to easing global financial conditions, while buying foreign exchange or tightening capital controls yields only small net benefits.
Keywords: Monetary Policy; Macroprudential Policy; FX Intervention; Capital Controls; Cost-Benefit Analysis
JEL Codes: E52; E58; F31; G28; E01; O24; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tightening macroprudential policy (E61) | Dampens downside risks to growth (E32) |
| Tightening macroprudential policy (E61) | Net benefits (J32) |
| Tightening monetary policy (E52) | Net losses (G33) |
| Foreign exchange interventions and capital flow management policies (F32) | Small net benefits (D61) |
| Tightening macroprudential policy (E61) | Reduces downside risks to growth from loose financial conditions (E44) |
| Tightening macroprudential policy (E61) | Mitigates financial vulnerabilities (F65) |