Capital Flows and Monetary Policy

Javier Gómez-Pineda

No 2097, Borradores de Economia from Banco de la Republica

Abstract: Capital flows often confront central banks with a dilemma: to contain the exchange rate or to allow it to float. To tackle this problem, an equilibrium model of capital flows is proposed. The model captures sudden stops with shocks to the country risk premium. This enables the model to deal with capital outflows as well as capital inflows. From the equilibrium conditions of the model, I derive an expression for the accounting of net foreign assets, which helps study the evolution of foreign debt under different policy experiments. The policy experiments point to three main conclusions. First, interest rate defenses of the exchange rate can deliver recessions during capital outflows even in financially resilient economies. Second, during unanticipated reversals in capital inflows, the behavior of foreign debt is not necessarily improved by containing the exchange rate. Third, an economy can gain resilience not by simply shifting the currency denomination of debt, but by both, shifting the denomination and floating the currency.

Keywords: Sudden stops; Credit booms; Country risk; Fear of floating; Debt sustainability (search for similar items in EconPapers)
JEL-codes: F32 F41 G15 H62 H63 (search for similar items in EconPapers)
Pages: 52
Date: 2006-03-01
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.banrep.gov.co/docum/ftp/borra395.pdf

Related works:
Working Paper: Capital Flows and Monetary Policy (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:col:000094:002097

Access Statistics for this paper

More papers in Borradores de Economia from Banco de la Republica
Bibliographic data for series maintained by Clorith Angelica Bahos Olivera ().