Capital Controls, Macroprudential Measures and Monetary Policy Interactions in an Emerging Economy

Abstract

Are capital controls and macroprudential measures desirable in an emerging economy? How do these instruments interact with monetary policy? I address these questions in a DSGE model for an emerging economy whose banks are indebted in foreign currency. The model is augmented with financial frictions. The main findings are as follows: (i) capital controls and macroprudential policies are able to mitigate the adverse effects of an increase in the foreign interest rate; (ii) the desirability of these measures is shock dependent; and (iii) capital controls and monetary policy are complementary in addressing the trade-off between inflation and financial fluctuations.JEL Classification: E44, E52, E58, F41.