It has been debated whether monetary policy should lean against the wind, i.e., if central banks should also respond to the build-up of financial imbalances. I contribute to the debate by showing that targeting the two policy objectives with a single instrument is more costly for a small-open economy than for a closed one. To this end, I develop a small-open economy DSGE model with the Bernanke-Gertler-Gilchrist financial accelerator that features financial frictions and monopolistic competition in goods markets. I then estimate this model for Mexico to explore the policy regimes yielding the lowest welfare cost. My main finding is that the Tinbergen rule is alive and well. In addition, my model is useful to gauge macroprudential measures effectiveness when discriminating against foreign liabilities.
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