Working Paper: NBER ID: w30038
Authors: Javier Bianchi; Louphou Coulibaly
Abstract: We investigate optimal monetary and macroprudential policies in an open economy with aggregate demand externalities and an occasionally binding zero lower bound constraint. The optimal policy balances output stabilization and capital flow management, potentially requiring lower or higher nominal interest rates. We show how international spillovers operate through the world real rate and call for macroprudential policies. Finally, we establish that a world economy with macroprudential policy welfare dominates a laissez-faire regime, in stark contrast with recent concerns.
Keywords: Liquidity Traps; Macroprudential Policy; International Spillovers; Monetary Policy
JEL Codes: E21; E23; E43; E44; E52; E62; F32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Nominal interest rates increase (E43) | Consumption decrease (E21) |
| Consumption decrease (E21) | Borrowing needs increase (F34) |
| Borrowing needs increase (F34) | Need for macroprudential policy increase (E49) |
| Absence of macroprudential policy (E60) | Intertemporal trade-off for monetary policy (E43) |
| Raising interest rates during economic booms (E43) | Decreased consumption (E21) |
| Optimal macroprudential policy (E61) | Enhanced macroeconomic stabilization (E63) |
| Macroprudential policy availability (E60) | Shift in monetary policy focus (E63) |
| Macroprudential policies (E61) | Insulation from adverse international monetary policy spillovers (F42) |
| Liquidity traps (E41) | Increased unemployment (J64) |
| With macroprudential policy (E60) | Unemployment reduced from 6% to 1.5% (J68) |
| With macroprudential policy (E60) | Welfare cost decreases from 0.5% to 0.1% of permanent consumption (D69) |
| International monetary policy spillovers (F42) | Negative effect on domestic welfare (H53) |