Macroprudential policy, capital flow management and monetary policy independence

Abstract

In the aftermath of the 2007-2009 global financial crisis, macroprudential policy and capital flow management emerge as two popular sets of policy tools which can help countries mitigate the impacts of financial crises. This paper investigates how the existence of both capital flow management and macroprudential policy can affect monetary policy independence. Using panel data covering 61 countries during the 2000-2017 period, this paper finds that (1) macroprudential policy does help home countries gain monetary independence, conditional on capital flow management. (2) Macroprudential policy has overlap effects with capital flow management but does not have a perfect substitutable relationship with capital flow management. The combination of macroprudential policy and capital flow management can better improve the home country's monetary independence. (3) Different macroprudential policies have heterogeneous effects on monetary independence.