Assessing the new "integrated policy framework": a counterfactual analysis of the case of Argentina

After decades advocating for the adoption of flexible exchange rate regimes, in the last ten years the International Monetary Fund (IMF) seems to have taken a more permissive stance toward developing countries’ central banks adopting foreign exchange interventions and capital flows management as tools to mitigate the effects of the global financial cycle on their domestic economies. More recently, the IMF has developed a new “integrated policy framework” built upon a New Keynesian model that seems to support this broader open-mindedness regarding policymaking in developing countries. Specifically, it is claimed that small open economies can achieve macroeconomic stability and economic growth through a combination of an inflation-targeting monetary policy, interventions in the foreign exchange market, some restrictions on capital inflows, and the use of macroprudential policy. This chapter assesses the prescriptions of this policy framework using an empirical stock-flow consistent model for Argentina, a country that for the last ten years has been suffering a balance of payments crisis. The integrated policy framework proposed by the IMF is counterfactually tested for the years 2016 and 2017, when the country was indeed a net recipient of foreign financial flows. The goal is to determine whether this suggested policy mix would have generated more sustainable dynamics compared to the ones observed, which ended up in a currency crisis in 2018. Based on the results of the experiment, the chapter offers some reflections on which lessons about the integrated policy framework can be generalized to other small open economies and which results should be understood as specific to the Argentinean context.