Abstract:
The limited experience of practising monetary and macroprudential policies at the same
time raises a question about the extent to which a macroprudential instrument - as a
complement to monetary policy - affects the macroeconomic stabilisation in emerging
markets, particularly in the presence of external shocks. By performing a systematic review of 125 articles, this thesis provides novel and insightful evidence on the interaction
between monetary and macroprudential policies in emerging markets by refining what
we already know on the extant relationship. It also provides a comprehensive synthesis
of the theoretical arguments on the interaction between the two policy expedients. For
the first time, we incorporate in our analysis the impact of policies embodied in the payment system
- such as the limitation of the value that can be settled through large-value
payment systems - hence making new inroads in the respective empirical literature. Further, it makes evident that a shift from currency - to electronic -based payments supports
financial intermediation. In addition to that, the study draws insights from the benefits
of FX intervention as an instrument in an emerging market that implements an inflation targeting framework. Not only do we model the risk appetite of investors as a shock to
the economy but we also take into account households with limited financial access. As a
result, it is demonstrated that FX intervention can be employed by policymakers to stabilise an economy during a period of capital
flow shocks. Finally, this thesis advances our
knowledge by developing a framework - in the emerging market context - to analyse the
impact of using reserve requirements combined with FX intervention as key instruments
in an inflation-targeting framework. It suggests that reserve requirement can be utilised
by policy makers to complement interest rate policy and FX intervention in stabilising
the economy during a period of external shocks, particularly a risk appetite shock.
