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The Mundell-Fleming IS-LM approach has guided generations of economists over the past 60 years. But countries have experienced new problems, the international finance literature has advanced, and the composition of the global economy has changed, so the scene is set for an updated approach. We propose an Integrated Policy Framework (IPF) diagram to analyze the use of multiple policy tools as a function of shocks and country characteristics. The underlying model features dominant currency pricing, shallow foreign exchange (FX) markets, and occasionally-binding external and domestic borrowing constraints. Our diagram includes the use of monetary policy, FX intervention, capital controls, and domestic macroprudential measures. It has four panels to explore four key trade-offs related to import consumption, home goods consumption, the housing market, and monetary policy. Our extended diagram adds fiscal policy into the mix.

Central Banks and Their Policies --- Currency crises --- Currency --- Debts, External --- Economic & financial crises & disasters --- Economic policy --- Economic theory & philosophy --- Economics of specific sectors --- Economics --- Economics: General --- Exchange rate arrangements --- Exchange rates --- Exports and Imports --- External debt --- Financial Institutions and Services: Government Policy and Regulation --- Foreign Exchange --- Foreign exchange --- Housing --- Imports --- Informal sector --- International economics --- International Lending and Debt Problems --- International trade --- Land prices --- Macroeconomics --- Nonagricultural and Nonresidential Real Estate Markets --- Open Economy Macroeconomics --- Policy Coordination --- Policy Designs and Consistency --- Policy Objectives --- Prices --- Property & real estate --- Public Finance --- Real Estate --- Trade: General

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This paper summarizes a suite of early warning models to assess the probabilities of growth, fiscal, and financial crises in advanced economies and emerging markets. We estimate separate signal-extraction models for each type of crisis and sample of countries, and we use our results to generate “histories of vulnerabilities” for countries, regions, and the world. For the global financial crisis, our models report that vulnerabilities in advanced economies were rooted in the bursting of leveraged bubbles, while vulnerabilities in emerging markets stemmed from lengthy booms in credit and asset prices combined with growing weaknesses in the corporate and external sectors.

Accounting --- Exports and Imports --- Financial Risk Management --- Macroeconomics --- Prices, Business Fluctuations, and Cycles: Forecasting and Simulation --- Macroeconomic Aspects of International Trade and Finance: Forecasting and Simulation --- Financial Crises --- Public Administration --- Public Sector Accounting and Audits --- Price Level --- Inflation --- Deflation --- International Investment --- Long-term Capital Movements --- Economic & financial crises & disasters --- Financial reporting, financial statements --- International economics --- Financial crises --- Global financial crisis of 2008-2009 --- Financial statements --- Asset prices --- Sudden stops --- Public financial management (PFM) --- Prices --- Balance of payments --- Global Financial Crisis, 2008-2009 --- Finance, Public --- Capital movements --- United States

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In the Mundell-Fleming framework, standard monetary policy and exchange rate flexibility fully insulate economies from shocks. However, that framework abstracts from many real world imperfections, and countries often resort to unconventional policies to cope with shocks, such as COVID-19. This paper develops a model of optimal monetary policy, capital controls, foreign exchange intervention, and macroprudential policy. It incorporates many shocks and allows countries to differ across the currency of trade invoicing, degree of currency mismatches, tightness of external and domestic borrowing constraints, and depth of foreign exchange markets. The analysis maps these shocks and country characteristics to optimal policies, and yields several principles. If an additional instrument becomes available, it should not necessarily be deployed because it may not be the right tool to address the imperfection at hand. The use of a new instrument can lead to more or less use of others as instruments interact in non-trivial ways.

Banks and Banking --- Exports and Imports --- Finance: General --- Foreign Exchange --- Infrastructure --- Current Account Adjustment --- Short-term Capital Movements --- Open Economy Macroeconomics --- International Investment --- Long-term Capital Movements --- Economic Development: Urban, Rural, Regional, and Transportation Analysis --- Housing --- International Financial Markets --- Interest Rates: Determination, Term Structure, and Effects --- International economics --- Macroeconomics --- Currency --- Foreign exchange --- Finance --- Banking --- Capital controls --- Exchange rates --- Currency markets --- Central bank policy rate --- Balance of payments --- National accounts --- Financial markets --- Financial services --- Capital movements --- Saving and investment --- Foreign exchange market --- Interest rates --- United States

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We develop a tractable small-open-economy framework to characterize the constrained efficient use of the policy rate, foreign exchange (FX) intervention, capital controls, and domestic macroprudential measures. The model features dominant currency pricing, shallow FX markets, and occasionally-binding external and domestic borrowing constraints. We characterize the conditions for the “traditional prescription”—relying on the policy rate and exchange rate flexibility—to be sufficient, even if externalities persist. The conditions are satisfied for world interest rate shocks if FX markets are deep. By contrast, we show that to manage non-fundamental inflow surges and taper tantrums related to local currency debt, capital inflow taxes and FX intervention should be used instead of the policy rate and exchange rate flexibility. In the realistic case where countries face both shallow FX markets and external borrowing constraints, we establish that some kinds of FX mismatch regulations may reduce the external debt limit friction but worsen FX market depth. Finally, we show that capital controls and domestic macroprudential measures cease to be perfect substitutes if there is a risk that the domestic borrowing constraint binds as a result of the transmission of the global financial cycle.

Central Banks and Their Policies --- Currency crises --- Economic & financial crises & disasters --- Economics of specific sectors --- Economics --- Economics: General --- Financial Institutions and Services: Government Policy and Regulation --- Informal sector --- Macroeconomics --- Open Economy Macroeconomics

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Insights from the IPF workstream can help guide the appropriate policy mix during an inflow surge, based on the shock and country characteristics. Inflow surges may be caused by a range of shocks and can take different forms in different countries. The IPF models suggest that warranted macroeconomic policy adjustments depend on the nature of the shock and country characteristics. The IPF models point to shocks and country characteristics that make it difficult to effectively respond to surges using only macroeconomic policy and exchange rate adjustment. The IPF models also suggest that, in the presence of overheating and overvaluation, the use of FXI and CFMs can enhance monetary autonomy in certain circumstances without generating other distortions. The relative costs and benefits of FXI and CFMs depend on country-specific factors. The IPF models also illustrate how surges can lead to a build-up of systemic financial risks. The IPF workstream connects the appropriate mix of MPMs and CFM/MPMs to the structure of the country's financial system.

Currency overlay. --- Balance of payments --- Capital flow management --- Capital movements --- Currency markets --- Economic policy --- Economics --- Exports and Imports --- Finance --- Finance: General --- Financial markets --- Foreign exchange market --- Integrated Policy Framework --- International economics --- International Financial Markets --- International Investment --- Long-term Capital Movements --- Macroeconomics --- Monetary economics --- Monetary Policy --- Monetary policy --- Money and Monetary Policy --- Policy Coordination --- Policy Designs and Consistency --- Policy Objectives --- Political Economy --- Political economy