A Safe-Asset Perspective for an Integrated Policy Framework* Markus K. Brunnermeier† Sebastian Merkel‡ Princeton University Princeton University Yuliy Sannikov§ Stanford University May 29, 2020 Latest Version: [Click Here] Abstract Borrowing from Brunnermeier and Sannikov(2016a, 2019) this policy paper sketches a policy framework for emerging market economies by mapping out the roles and interactions of monetary policy, macroprudential policies, foreign ex- change interventions, and capital controls. Safe assets are central in a world in which financial frictions, distribution of risk, and risk premia are important ele- ments. The paper also proposes a global safe asset for a more self-stabilizing global financial architecture. Keywords: Safe asset, bubbles, international capital flows, capital controls, mon- etary policy, macroprudential policy, FX interventions, capital controls *This paper was prepared for the 7th Asian Monetary Policy Forum. We especially thank Joseph Abadi. †Email:
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[email protected]. 1 1 Introduction International monetary and financial systems have become inextricably entwined over the past decades, leading to strong and volatile cross-border capital flows as well as powerful monetary policy spillovers. The Integrated Policy Framework (IPF) pro- posed by the IMF seeks to address these issues by developing a unified framework to study optimal monetary policy, macroprudential policies, foreign exchange interven- tions, and capital controls in an interconnected global financial system. In that framework, the key friction that gives rise to a role for monetary policy is price stickiness: monetary policy primarily serves to stabilize demand, and interna- tional capital market imperfections force central banks to trade off domestic demand against financial stability.